Surging car sales are driving Consumer Portfolio Services Inc.’s climb back after a tough few years for the Irvine-based auto lender.
Consumer Portfolio targets individuals with credit problems, also known as the subprime market. The segment grew in the aftermath of the recent recession, which left many consumers with roughed-up credit histories.
“The credit crisis and the Great Recession have expanded our base of customers,” said Robert Riedl, Consumer Portfolio’s senior vice president and chief investment officer.
The company faced challenges of its own before the economic recovery took hold.
“We got hit pretty hard through the financial crisis,” Riedl said. “We lost our funding, and that caused us to shrink the business for a couple of years.”
The company is growing again, and currently counts 540 employees at its headquarters here and three other locations in the U.S. It makes car loans to customers of auto dealerships, with funding from short-term credit facilities. It then packages the loans to sell in the form of asset-backed bonds to institutional investors, a practice called securitization.
Consumer Portfolio’s loan volume peaked in 2007 at $1.3 billion. It tumbled to $300 million in 2008, and slipped to about $12 million in 2009, at the depths of the recession.
The company now is back to about half its pre-recession level, Riedl said.
“We’re really growing back to where we used to be,” he said. “We’ve really turned things around here. We’ve had profitability over the last four quarters.”
The most recent quarterly report showed Consumer Portfolio posted $2.7 million in net income over the three months through September, an about-face from net loss of $4 million over the same time last year.
Profit so far this year is $4.6 million, versus a loss of $14.7 million last year.
A broad recovery in car sales has “absolutely” helped the business, according to Riedl.
Sales of new vehicles in the U.S.—which fell to a 27-year low of 10.4 million in 2009—are on pace to top 14 million this year.
“Over the last couple of years, new car sales have come back,” he said. “There’s a pent-up demand as people have held on to their cars longer than they used to. Cars are made better today, so that’s been possible. Now, as more people are looking to replace vehicles, new contract purchases increase as well.”
Keeping Cars
Another driver that has kept the business going was that borrowers were more likely to keep their cars than troubled mortgages, according to Riedl.
“You can sleep in your car, but you can’t drive your house to work,” he said. “There’s been a debate between the mortgage guys and the auto guys. Recent research has looked at what payments people have made throughout the recession. The findings have validated the auto side of things.”
Lending to subprime borrowers no doubt has its risks and thus calls for more work.
“It’s more labor-intensive,” Riedl said. “There’s more paperwork involved. We require more documentation, and we require more checks before we buy the loans. [And that’s partly why] a lot of dealerships got out of serving those customers during the down years. But more dealerships have gotten back into servicing subprime customers, and that’s helped us.”
Consumer Portfolio currently has $200 million in short-term funding capacity through Goldman Sachs & Co., Fortress Investment Group LLC and Citibank. It had $845 million under management as of September, down from a peak of $2.13 billion in December 2007, but up 12% from a recent low at the end of 2010.
The company recently sold five tranches of asset-back notes worth $147 million. It expects to sell another batch of loans before the end of this year, Riedl said.
“There’s a huge demand from institutions and fixed-income investors for the bonds that we package,” he said.
The taint associated with the notion of risky investments has more or less faded, Riedl added.
“Subprime was very much a negative connotation when things were deteriorating in 2008,” he said. “You saw ‘subprime mortgages’ in the headlines, and we got lumped in with the mortgage guys. There’s not as much of that anymore. Our industry has actually attracted a lot of private-equity capital over the last two or three years as the economy has stabilized and as yields have improved.”
