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CPS CEO: Finance Source Ahead of the Compliance Curve

February 24, 2015

By Brittany-Marie Swanson

IRVINE, Calif. — In a quarterly earnings conference call last week, Consumer Portfolio Services CEO Charles Bradley laid out the finance source’s compliance strategy in light of a U.S. Department of Justice (DOJ) investigation and recent actions against CPS by the Federal Trade Commission (FTC).

Last year, CPS agreed to pay $5.5 million to settle FTC charges that it used illegal tactics to collect on consumers’ loans, including collecting money consumers did not owe, harassing consumers and third parties, and disclosing debts to the friends, family, and employers of its customers.

“The regulatory market obviously is continuing to be more interesting by the day, and so, we have spent an awful lot of time — particularly in the collections front — training everyone in terms of all the different compliance areas,” said Bradley, adding that he expects to see a big improvement in terms of how the company collects on its loans down the road.

Despite the settlement, which was reached in the second quarter of 2014, the finance source saw increases in earnings and revenue both annually and during the fourth quarter. Fourth quarter earnings were at $8 million, or 25 cents per diluted share, an increase of 19% over the same period last year. Revenue jumped 25.4%, or $16.9 million, to $83.5 million for the quarter.

“We did originate $264 million of new receivables in the fourth quarter. That brought us up to $945 million for the full year,” said CFO Jeff Fritz. “So our consolidated portfolio increased about 9% for the quarter and 38% for the full year. Of course, that’s driving all that revenue growth.”

The company’s full-year earnings for 2014 were $29.5 million, or 92 cents per diluted share, as compared to earnings of $21.0 million, or 67 cents per diluted share, for 2013. This was a 37% increase in earnings per diluted share.

“If you look at this as an industry, the auto industry, car sales are booming. Everybody is after buying cars,” Bradley said. “You’ve got a bunch of reasons why the auto industry should be just great. And as such, the auto financing industry should be great too.”

Bradley also addressed the Consumer Financial Protection Bureau (CFPB)’s actions in the auto lending arena, as well as a DOJ subpoena the company received on Jan. 14 requesting documents related to its subprime auto finance practices and related securitization activities.

“… Compared to the FTC [action], where they were coming to talk to or look at us for specific reasons, the DOJ [investigation] certainly feels like we have gotten the same thing as everyone else in the industry,” Bradley said. Santander Consumer USA, Credit Acceptance, GM Financial, and Ally Financial were also subpoenaed by the regulator.

But when it comes to the CFPB’s examination of auto lending and whether minorities are paying higher rates for car loans, Bradley believes CPS is “way ahead of that curve.”

“We have done a fairly exhaustive review that’s not quite finished of our own lending practices and portfolio,” he noted. “And I have found that we have no disparity of impact in terms of lending to protected classes.”

Additionally, CPS is examining its dealer network, which numbers between 8,000 and 10,000 dealers. If disparate impact is identified in a dealer’s portfolio, Bradley said, they are removed from the lender’s program and put in a rehabilitation program.

“Those kinds of things … I think can put us in a very strong position in terms of where we sit with all the CFPB stuff that’s coming down the pipe,” the executive said. “And again, the DOJ is a separate sort of area, but we feel we are rather comfortable in terms of how we sell our portfolios in the marketplace, which we have been doing for 20 years or so.”

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