Credit Acceptance Corp. has increased investor protections, slightly, in its second securitization of the year of subprime auto loans.

The senior $281.2 million tranche of the $450 million Credit Acceptance Auto Loan Trust 2018-2 benefits from initial credit enhancement of 51.61%, up from 49.93% in its previous transaction, completed in February. The extra protection comes in the form of additional subordination: The subordinate notes, which are first in line to take losses, account for a larger proportion of the capital stack.

Wells Fargo and BMO are the deal's underwriters.

The senior, Class A notes carry the same triple-A ratings from Moody's Investors Service and S&P Global Ratings.

The portion of the $92.5 million Class B notes tranche (Aa2/AA) is slightly up to 16.44% from 16.25% of the 2018-1 pool.

But the big change is in the Class C notes totaling $76.3 million (rated A2 by Moody’s, A by S&P), which represent 13.56% of the pool, compared with 12.1% in this year’s first securitization pool.


The notes are backed by retail installment contracts with $938.2 million in original balances and $735.5 million in outstanding balances from 95,982 credit-challenged borrowers with a weighted average FICO of 546. The loans carry high 22.3% APR terms on contracts average 58 months for high-mileage cars up to12 years of age.

There is a two-year revolving period during which additional collateral can be added, subject to certain concentration limits. Both Moody's and S&P consider this to be a credit weakness, given the potential for adding higher-risk loans to the pool.

CAC differs from other subprime lenders in the “buy here, pay here” space in that it services the loans it originates, and only funds a portion of the original retail installment contract at closing through dealer advances. These advances are provided to dealers after subtracting the amount CAC expects to collect over the life of the loan and are securitized as cross-collateralized pools of at least 100 consumer loans.

Upon the repayment of advances, dealers receive 80% of the collections, with CAC collecting the remaining 20% as a servicing fee. The back-end profits for dealers align their interests with CAC’s to better screen loan applicants as well as assist in workouts.

More than 67% of the pool’s collateral is made up of dealer advances. The remaining 33% consists of purchased loans picked up from franchise dealers that normally are stronger financially and do not participate in advances.

Moody’s has assigned 27% expected loss levels on the deal, while S&P has a projected loss range of 19.75%-20.25% over the course of the transaction. Both levels are unchanged from each agency’s review of CAC’s 2018-1 transaction.

CAC launched the transaction nearly a week after the company announced first-quarter earnings of $120.1 million, up from $93.3 million in the first quarter of 2017. However, the company also disclosed that it is under investigation by New York officials looking into borrower discrimination complaints, and also whether it provided inaccurate information during a supervisory examination.

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