McGee analyzed credit reports and verified all information provided by credit applicants, e.g., by directly contacting employers, banks, and creditors.

ACC pays each of its key management personnel a base salary. Each of these individuals is also entitled to receive an annual bonus at the sole discretion of ACC's board of directors. The bonuses are paid from a "bonus pool" established by ACC and in which ACC places funds in an amount up to 16.25 percent of its pretax net profits. Except in the case of James Blasius, no restrictions exist as to the amount of compensation that ACC may pay to its officers or key employees. James Blasius' bonus is limited to 55 percent of the pool.

Under the terms of each installment contract, an individual buys an automobile from a dealer at a set price to be paid (with interest) in monthly installments. The average rate of interest charged to the buyers is approximately 22 percent. The length of repayment ranges from 12 to 36 months.

ACC and the dealers have an independent agreement under which the dealers sell some of the installment contracts (and the right to the corresponding payments of principal and interest) to ACC at a price equal to 65 percent of each contract's principal amount (i.e., at a 35-percent discount). As of April 30, 1993, ACC acquired the installment contracts from 13 dealers, 3 of which sold to ACC 69.4 percent of the installment contracts which ACC acquired. ACC is not obligated to acquire all of the installment contracts offered to it by the dealers but generally must decide whether it will acquire a particular installment contract before the related automobile sale is finalized. ACC rests its decision as to the acquisition of an installment contract on its analysis of the buyer's creditworthiness. That analysis generally includes ACC'S review of the buyer's credit application, ACC's obtaining one or more credit reports on the buyer, ACC's verifying the buyer's job status, salary, and residence, and ACC's evaluation of various aspects of the buyer's credit history such as payment history and financial stability. If ACC acquires an installment contract, the dealer generally assigns its rights under that contract to ACC as part of the automobile sale, and ACC pays the dealer the 65-percent amount upon ACC's receipt of all of the documents relating to the installment contract. The automobile buyer pays ACC all amounts due under the install

ment contract, and the automobile buyer collateralizes his or her obligation to make those payments with the purchased automobile.+ ACC may repossess and sell the automobile if the buyer defaults on the installment contract.

ACC's acquisition of installment contracts generally followed an established procedure. First, ACC would contact dealers and advise them that it was in the business of acquiring installment contracts on an ongoing basis. Second, ACC would enter into the independent agreement with each dealer that decided to sell its installment contracts to ACC, and the dealer would provide ACC with its seller's license. Third, the dealer, when faced with a prospective automobile buyer who did not qualify for traditional financing, would alert the buyer to ACC's financing business. Fourth, a buyer who wanted to finance the purchase with ACC would complete a detailed credit application that the dealer would transmit to ACC by facsimile. Fifth, ACC would record the application in its daily log and perform its credit review process. Sixth, to the extent that ACC decided favorably on a credit application, and the buyer accepted ACC's financing arrangement,5 ACC would issue the dealer a check for the 65percent amount on the next Friday, or, if ACC had not yet received the requisite documentation from the dealer, on the first Friday after it received that documentation. One piece of documentation required by ACC was the fully executed installment contract that was printed on a form that bore ACC's name, logo, address, and telephone number. Upon receipt of this contract, ACC assigned the applicant an account number and entered all applicable information into its computerized collection system.

ACC's credit review process generally included six steps, all of which ACC could perform within 3 to 4 hours. First, ACC would access electronically credit bureau reports on the applicant and assign points to certain items shown on the reports. Second, ACC would measure the total points either against preestablished levels for approval or denial or against an arbitrary level of approval or denial that was ascertained intuitively. Third, ACC would analyze through

4 ACC services all of the installment contracts it acquires.

5 ACC's approval of an application did not always result in its acquisition of the related installment contract. An applicant sometimes decided for one reason or another not to accept ACC's financing arrangement.

debt-to-income and loan-to-value ratios an applicant's ability to pay the debt, taking into account his or her disposable income and income per dependent. ACC would sometimes perform in connection with this step a budgetary analysis to suggest changes to the loan terms (e.g., by decreasing the monthly payment over a longer timeframe) so as to meet preestablished target ratios. Fourth, ACC would conditionally approve or deny an applicant on the basis of all of the information that it had already accumulated. Fifth, as to applications that received a conditional approval, ACC would perform an additional review as to the applicant by verifying (mainly by telephone) his or her employment, residency, and personal references, and by interviewing the applicant by telephone. Sixth, as to the applicants who passed this additional level of review, ACC would communicate to the dealer ACC's approval of the applicant. In some instances, ACC would inform the dealer that it was unwilling to finance the purchase under the terms offered to it but would finance a lesser amount of principal and/or would finance the purchase over a shorter repayment term.

In 1993 and 1994, ACC paid installment contracts expenditures totaling $267,832 and $339,211, respectively. These expenditures, which were attributable to ACC's obtaining of credit reports and screening of credit histories, related primarily to the portion of ACC's payroll and overhead expenses that was attributable to its credit analysis activities.6 None of these expenditures included any postacquisition or servicing expenses. ACC ascertained the amount of these expenditures at the request of its independent auditors. The parties agree that these expenditures are "related" to ACC's credit analysis activities and that the breakdown of specific expenditures is as set forth below. The parties dispute whether any or all of the expenditures is "directly related" to ACC's credit analysis activities, as contended by respondent, or is "indirectly related" to those activities, as contended by petitioners.

6 We use the term "credit analysis activities" to refer to ACC's credit review services and its funding services (i.e., ACC's issuance of the checks to dealers in consideration for the installment contracts).

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