LAS VEGAS -

Consumer Portfolio Services chairman and chief executive officer Brad Bradley explained why the company’s noticeable rise in delinquencies stems from adjustments in collection practices that federal regulators forced the company to make.

To recap, back in May of last year, CPS reached a $5.5 million settlement with the Federal Trade Commission to squash charges that the subprime auto finance company used “illegal tactics” to service and collect consumers’ loans, including collecting money consumers did not owe, harassing consumers and third parties, and disclosing debts to friends, family and employers.

During the company’s quarterly conference call earlier this week, Bradley indicated that it took CPS about six months to modify its collections practices, acknowledging that some personnel in this department have been with the company for some so “trying to get them to learn and do it another way is a long process.”

As a result, CPS reported that its third quarter delinquencies greater than 30 days (including repossession inventory) jumped from 6.66 percent to 8.81 percent. The year-over-year movement triggered a series of questions from investment analysts who wanted to know how that metric was going to impact CPS’ defaults and recovery rates, which also softened year-over-year from 44.6 percent to 40.0 percent.

To quell concern, Bradley spelled out exactly how the collection process unfolds at CPS nowadays.

“Back in the day, you could call a customer up and say, ‘Hey, you are 30 days down or one payment down or two payments down. You need to pay me today or we are going to repossess your car,’” Bradley said. “The regulatory folks didn’t like us saying that to them. You don’t get to say that until they are about 90 days down, three payments. And shockingly when you say, then it works.”

Bradley indicated federal regulators described previous practices when a borrower was behind on payments as “threatening.” CPS has been forced to ease back on the demands for immediate payment but collectors still remain firm when the account hits 90 days past due.

“We may not particularly agree with the term threatening, but at least then you push (delinquent customers) to say, ‘Hey, ‘You need to pay us today or you’re in serious risk of losing your car.’ Then a lot of people pay,” Bradley said. “To the extent you say, ‘Hey, it’s really important you pay, and let’s work something out,’ shockingly they still pay, just takes an extra two months. That’s really fundamentally the exact difference of what we are doing.

“A lot of the way collections is driven in many companies including ours, is you want the collector to collect the payment today. You want them to get the customer to send something today,” he continued. “In the new world, that isn’t really the way to do it. So it’s taking us a dramatic amount of time to convince our collectors not to try and get them pay today.

“The customer says, ‘Hey, I can probably pay you next week.’ That wasn’t good enough in the old dynamic,” Bradley went on to say. “Eventually they do because at the end of the road, you got to tell him, you are in danger of losing your car and that’s when they pay.”

But analysts still wondered if CPS’ portfolio would deteriorate with delinquencies on the rise and recovery rates softening because of company officials conceding that rising off-lease volume is impacting what they can get back in the repossession lanes on the wholesale market. Bradley is confident funds eventually will flow into the company as payments; they might be just delayed.

“In the regulatory environment, you don’t push anymore,” Bradley said. “You give them the time not to string you along, but take some more time.

“There’s two aspects,” he continued. “One is the manner in which you have to address the customers, and two is the dynamic of how the collection arms work. The collection arms used to work to get the money in today, period. And now that’s not true.

“It’s a simple explanation at some level. It is a lot tougher to make it all work,” Bradley added.

Q3 financial report

CPS reported that its Q3 earnings came in at $8.8 million, or $0.28 per diluted share. Those figures are higher than a year ago when net income came in at $7.8 million, or $0.24 per diluted share. The improvement represented a 16.7-percent increase in diluted earnings per share.

The company generated a 22-percent rise in Q3 revenue, watching it climb from $77.1 million to $94.0 million. Meanwhile, CPS noted total operating expenses for the third quarter increased $15.1 million or 23.9 percent to $78.3 million

During the third quarter, CPS purchased $287.5 million of new contracts, an increase of 2.9 percent, compared to $279.3 million during the third quarter of last year.  The company's managed receivables totaled $1.941 billion as of Sept. 30, an increase from $1.822 billion as of June 30 and $1.519 billion as of the end of last year’s third quarter.

“We are pleased with our operating results for the third quarter of 2015,” Bradley said. “Our managed portfolio is now in excess of $1.9 billion and we achieved our 16th consecutive quarter of increasing quarterly earnings.”