Item 1. Business
Item 1. Business
Overview
We are a specialty finance
company. Our business is to purchase and service retail automobile contracts originated primarily by franchised automobile dealers and,
to a lesser extent, by select independent dealers in the United States in the sale of new and used automobiles, light trucks and passenger
vans. Through our automobile contract purchases, we provide indirect financing to the customers of dealers who have limited credit histories
or past credit problems, who we refer to as sub-prime customers. We serve as an alternative source of financing for dealers, facilitating
sales to customers who otherwise might not be able to obtain financing from traditional sources, such as commercial banks, credit unions
and the captive finance companies affiliated with major automobile manufacturers. In addition to purchasing installment purchase contracts
directly from dealers, we also have (i) originated vehicle purchase money loans by lending directly to consumers and have (ii) acquired
installment purchase contracts in four merger and acquisition transactions, and (iii) purchased immaterial amounts of vehicle purchase
money loans from non-affiliated lenders. In this report, we refer to all of such contracts and loans as "automobile contracts."
We were incorporated and
began our operations in March 1991. From inception through December 31, 2024, we have purchased a total of approximately $23.0 billion
of automobile contracts from dealers. In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers
and acquisitions in 2002, 2003, 2004 and 2011. Contract purchase volumes and managed portfolio levels for the five years ended December
31, 2024 are shown in the table below. Managed portfolio comprises both contracts we owned and those we were servicing for third parties.
Contract Purchases and Outstanding Managed Portfolio
$ in thousands
Year
Contracts Purchased in Period
Managed Portfolio at Period End
2020
742,584
2,174,972
2021
1,146,321
2,249,069
2022
1,854,385
3,001,308
2023
1,357,752
3,194,623
2024
1,681,941
3,665,725
Our principal executive offices
are in Las Vegas, Nevada. Most of our operational and administrative functions take place in Irvine, California. Credit and underwriting
functions are performed primarily in our California branch with certain of these functions also performed in our Florida and Nevada branches.
We service our automobile contracts from our California, Nevada, Virginia, Florida, and Illinois branches.
Most of our contract acquisitions
volume results from our purchases of retail installment sales contracts from franchised or independent automobile dealers. We establish
relationships with dealers through our employee sales representatives, who contact prospective dealers to explain our automobile contract
purchase programs, and thereafter provide dealer training and support services. Our sales representatives represent us exclusively. They
may work from our Irvine branch, our Las Vegas branch, or in the field, in which case they work remotely and support dealers in their
geographic area. Our sales representatives present dealers with a sales package, which includes our promotional material containing the
terms offered by us for the purchase of automobile contracts, a copy of our standard-form dealer agreement, and required documentation
relating to automobile contracts. As of December 31, 2024, we had 122 sales representatives, and in that month, we received applications
from 8,600 dealers in 47 states. As of December 31, 2024, approximately 72% of our active dealers were franchised new car dealers that
sell both new and used vehicles, and the remainder were independent used car dealers.
1
We have in the past solicited
credit applications directly from prospective automobile consumers through the internet under a program we refer to as our direct lending
platform. For qualified applicants we offered terms similar to those that we offer through dealers, though without a down payment requirement
and with more restrictive loan-to-value and credit score requirements. Applicants approved in this fashion are free to shop for and purchase
a vehicle from a dealer of their choosing, after which we entered into a note and security agreement directly with the consumer. We terminated
our direct lending platform in September 2023 and we do not intend to originate any such loans going forward. However, we intend to continue
servicing our existing direct loans. As of December 31, 2024, automobile contracts under the direct lending platform represented 1.6%
of our outstanding managed portfolio.
For the year ended December
31, 2024 approximately 91% of the automobile contracts originated under our programs consisted of financing for used cars and 9% consisted
of financing for new cars.
We generally solicit applications
with the intent of originating contracts to hold as investments in our own portfolio. However, in May 2021 we began purchasing some contracts
for immediate sale to a third-party to whom we refer applications that do not meet our lending criteria. We service all such contracts
on behalf of the third-party.
For contracts we originate
for our own portfolio, we generally finance them on a long-term basis through securitizations. Securitizations are transactions in which
we sell a specified pool of automobile contracts to a special purpose subsidiary of ours. The subsidiary in turn issues (or contributes
to a trust that issues) asset-backed securities, which are purchased by institutional investors. Since 1994, we have completed 103 term
securitizations of approximately $20.6 billion in automobile contracts. We depend upon the availability of short-term warehouse credit
facilities as interim financing for our contract purchases prior to the time we pool those contracts for a securitization. As of December
31, 2024, we had two such short-term warehouse facilities with a total maximum borrowing capacity of $535 million.
Sub-Prime Auto Finance Industry
Automobile financing is the
second largest consumer finance market in the United States. The automobile finance industry can be considered a continuum where participants
choose to provide financing to consumers in various segments of the spectrum of creditworthiness depending on each participant’s
business strategy. We operate in a segment of the spectrum that is frequently referred to as sub-prime since we provide financing to less
credit-worthy borrowers at higher rates of interest than more credit-worthy borrowers are likely to obtain.
Traditional automobile finance
companies, such as banks, their subsidiaries, credit unions and captive finance subsidiaries of automobile manufacturers, generally lend
to the most creditworthy, or so-called prime borrowers, although some traditional lenders are significant participants in the sub-prime
segment in which we operate. Historically, independent companies specializing in sub-prime automobile financing and subsidiaries of larger
financial services companies have competed in the sub-prime segment which we believe remains highly fragmented, with no single company
having a dominant position in the market.
Our automobile financing programs
are designed to serve sub-prime customers, who generally have limited credit histories or past credit problems. Because we serve customers
who are unable to meet certain credit standards, we incur greater risks, and generally receive interest rates higher than those charged
in the prime credit market. We also sustain a higher level of credit losses because of the higher risk customers we serve.
2
Contract Acquisitions
When a retail automobile buyer
elects to obtain financing from a dealer, the dealer takes a credit application to submit to its financing sources. Typically, a dealer
will submit the buyer’s application to more than one financing source for review. We believe the dealer’s decision to choose a financing
source is based primarily on: (i) the interest rate and monthly payment made available to the dealer’s customer; (ii) any fees to be charged
to (or paid to) the dealer by the financing source; (iii) the timeliness, consistency, and predictability of response; (iv) funding turnaround
time; (v) any conditions to purchase; and (vi) the financial stability of the financing source. Dealers can send credit applications to
us by entering the necessary data on our website or through one of two third-party application aggregators. For the year ended December
31, 2024, we received 3.3 million applications. Approximately 57% of all applications came through DealerTrack (the industry leading dealership
application aggregator), 43% via another aggregator, Route One. A portion of the DealerTrack and Route One volume are applications from
our pass-through arrangements with other lenders who send us applications from their dealers in cases where those lenders choose not to
approve those applications. For the year ended December 31, 2024, such pass-through applications represented 41% of our total applications.
For the year ended December 31, 2024, our automated application decisioning system produced our initial decision within seconds on approximately
99% of those applications.
Upon receipt an application,
if the application meets certain minimum criteria, we immediately order two credit reports to document the buyer’s credit history and
an alternative data credit score provided by a major credit reporting bureau. If, upon review by our proprietary automated decisioning
system, or in some cases, one of our credit analysts, we determine that the applicant and structure of the automobile financing contract
meets our criteria, we advise the dealer of our decision to approve the contract and the terms under which we will purchase it. For applications
that do not meet our criteria, we may forward them to one or more business partners who also invest in subprime automobile contracts.
In the case of one third-party partner, as described above, we may purchase contracts they approve, followed by immediate resale to them,
after which we retain the servicing. If this third-party declines the application, we advise the dealer that we will not purchase the
contract. Other partners to whom we refer applications may or may not choose to purchase such contracts by working directly with the dealers
who submitted the applications. Unless otherwise notated, contract origination and managed portfolio data discussed herein includes third-party
contracts.
Dealers with which we do business
are under no obligation to submit any automobile contracts to us, nor are we obligated to purchase any automobile contracts from them.
During the year ended December 31, 2024, no dealer accounted for as much as 2% of the total number of automobile contracts we purchased.
Under our direct lending platform,
the applicant submits a credit application directly to us via our website, or in some cases, through a third-party who accepts such applications
and refers them to us for a fee. In either case, we process the application with the same automated application decisioning process as
described above for applications from dealers. We then advise the applicant as to whether we would grant them credit and on what terms.
The following table sets forth
the geographical sources of the automobile contracts we originated (based on the addresses of the customers as stated on our records)
during the years ended December 31, 2024 and 2023.
Contracts Purchased During the Year Ended
December 31, 2024
December 31, 2023
Number
Percent (1)
Number
Percent (1)
Texas
5,985
7.8%
4,620
7.1%
Ohio
5,643
7.3%
4,015
6.2%
California
4,583
6.0%
3,911
6.0%
Illinois
4,399
5.7%
4,482
6.9%
Florida
4,148
5.4%
3,489
5.4%
Georgia
3,432
4.5%
2,598
4.0%
Other States
48,819
63.4%
42,022
64.5%
Total
77,009
100.0%
65,137
100.0%
(1) Percentages may not total to 100.0% due to rounding.
3
The following table sets forth the geographic concentrations
of our outstanding managed portfolio as of December 31, 2024 and 2023.
Outstanding Managed Portfolio as of
December 31, 2024
December 31, 2023
Amount
Percent (1)
Amount
Percent (1)
($ in millions)
California
$ 275.2
7.5%
$ 274.7
8.6%
Texas
287.3
7.8%
237.6
7.4%
Ohio
265.5
7.2%
232.7
7.3%
Illinois
204.3
5.6%
173.3
5.4%
Florida
185.0
5.0%
160.2
5.0%
Pennsylvania
168.3
4.6%
152.8
4.8%
All others
2,280.1
62.2%
1,963.3
61.5%
Total
$ 3,665.7
100.0%
$ 3,194.6
100.0%
(1) Percentages may not total to 100.0% due to rounding.
We purchase automobile contracts
from dealers at a price generally computed as the total amount financed under the automobile contracts, adjusted for an acquisition fee,
which may be comprised of multiple components and which may either increase or decrease the automobile contract purchase price we pay.
The amount of the acquisition fee, and whether it results in an increase or decrease to the automobile contract purchase price, is based
on the perceived credit risk of and, in some cases, the interest rate on the automobile contract. The following table summarizes the
average net acquisition fees we charged dealers and the weighted average annual percentage rate on contracts purchased for our own portfolio
for the periods shown:
2024
2023
2022
2021
2020
Average net acquisition fee charged (paid) to dealers (1)
$ (50 )
$ 98
$ (150 )
$ (65 )
$ 71
Average net acquisition fee as % of amount financed (1)
-0.2%
1.3%
-0.7%
-0.3%
0.4%
Weighted average annual percentage interest rate
20.4%
20.9%
18.4%
17.8%
19.3%
(1)
Not applicable to direct lending platform
Our pricing strategy is driven
by our objectives for new contract purchase quantities and maximizing our risk adjusted yield. We believe that levels of acquisition fees
are determined primarily by competition in the marketplace, which has been robust over the periods presented, and by our pricing strategy.
We make changes to our pricing algorithm based on our volume goals, our own costs for borrowing and periodic recalibration of our risk-based
scoring models.
We have offered eight different
financing programs, and price each program according to the relative credit risk. Our programs cover a wide band of the sub-prime credit
spectrum and are labeled as follows:
First Time Buyer
– This program accommodates an applicant who has limited significant past credit history, such as a previous auto loan. Since the
applicant has limited credit history, the contract interest rate and dealer acquisition fees tend to be higher, and the loan amount, loan-to-value
ratio, down payment, and payment-to-income ratio requirements tend to be more restrictive compared to our other programs.
4
Mercury / Delta
– This program accommodates an applicant who may have had significant past non-performing credit including recent derogatory credit.
As a result, the contract interest rate and dealer acquisition fees tend to be higher, and the loan amount, loan-to-value ratio, down
payment, and payment-to-income ratio requirements tend to be more restrictive compared to our other programs.
Standard
– This program accommodates an applicant who may have significant past non-performing credit, but who has also exhibited some performing
credit in their history. The contract interest rate and dealer acquisition fees are comparable to the First Time Buyer and Mercury/Delta
programs, but the loan amount and loan-to-value ratio requirements are somewhat less restrictive.
Alpha –
This program accommodates applicants who may have a discharged bankruptcy, but who have also exhibited performing credit. In addition,
the program allows for homeowners who may have had other significant non-performing credit in the past. The contract interest rate and
dealer acquisition fees are lower than the Standard program, down payment and payment-to-income ratio requirements are somewhat less restrictive.
Alpha Plus –
This program accommodates applicants with past non-performing credit, but with a stronger history of recent performing credit, such as
auto or mortgage related credit, and higher incomes than the Alpha program. Contract interest rates and dealer acquisition fees are lower
than the Alpha program.
Super Alpha
– This program accommodates applicants with past non-performing credit, but with a somewhat stronger history of recent performing
credit, including auto or mortgage related credit, and higher incomes than the Alpha Plus program. Contract interest rates and dealer
acquisition fees are lower, and the maximum loan amount is somewhat higher, than the Alpha Plus program.
Preferred
- This program accommodates applicants with past non-performing credit, but who demonstrate a somewhat stronger history of recent performing
credit than the Super Alpha program. Contract interest rates and dealer acquisition fees are lower, and the maximum loan amount is somewhat
higher than the Super Alpha program.
Meta - This
program accommodates applicants with past non-performing credit, but who demonstrate a stronger history of recent performing credit than
the Preferred program. Contract interest rates and dealer acquisition fees are lower, and the maximum loan amount is somewhat higher than
the Preferred program.
Our upper credit tier products,
which are our Meta, Preferred, Super Alpha, Alpha Plus and Alpha programs, accounted for approximately 89% of our new contract acquisitions
for our own portfolio in 2024, 83% in 2023, and 80% in 2022, measured by aggregate amount financed.
The following table identifies
the credit program, sorted from highest to lowest credit quality, under which we originated automobile contracts during the years ended
December 31, 2024 and 2023.
Contracts Purchased During the Year Ended (1)
December 31, 2024
December 31, 2023
(dollars in thousands)
Program
Amount Financed
Percent (1)
Amount Financed
Percent (1)
Meta
$ 55,241
3.3%
$ 45,319
3.3%
Preferred
278,044
16.5%
175,122
12.9%
Super Alpha
338,156
20.1%
265,385
19.5%
Alpha Plus
372,345
22.1%
179,526
13.2%
Alpha
424,433
25.2%
383,512
28.2%
Standard
116,159
6.9%
103,499
7.6%
Mercury / Delta
27,554
1.6%
52,250
3.8%
First Time Buyer
37,317
2.2%
52,313
3.9%
Third Parties
32,692
1.9%
100,826
7.4%
$ 1,681,941
100.0%
$ 1,357,752
100.0%
(1) Percentages may not total to 100.0% due to rounding.
5
We attempt to control misrepresentation
regarding the customer’s credit worthiness by carefully screening the automobile contracts we originate, by establishing and maintaining
professional business relationships with dealers, and by including certain representations and warranties by the dealer in the dealer
agreement. Pursuant to the dealer agreement, we may require the dealer to repurchase any automobile contract if the dealer breaches its
representations or warranties. There can be no assurance, however, that any dealer will have the willingness or the financial resources
to satisfy their repurchase obligations to us.
Contract Funding
For automobile contracts that
we purchase from dealers, we require that the contract be originated by a dealer that has entered into a dealer agreement with us. Under
our direct lending platform, we required the customer to sign a note and security agreement. In each case, the contract is secured by
a first priority lien on a new or used automobile, light truck or passenger van and must meet our funding criteria. In addition, each
automobile contract requires the customer to maintain physical damage insurance covering the financed vehicle and naming us as a loss
payee. We may, nonetheless, suffer a loss upon theft or physical damage of any financed vehicle if the customer fails to maintain insurance
as required by the automobile contract and is unable to pay for repairs to or replacement of the vehicle.
Our technology and human expertise
provides for a 360-degree evaluation of an applicant’s employment and residence stability, income level and affordability, and creditworthiness
in relation to the desired collateral securing the automobile contract. This perspective is used to assign application and structure allowances
and limits related to price, term, amount of down payment, monthly payment, and interest rate; type of vehicle; and principal amount of
the automobile contract in relation to the value of the vehicle.
Specifically, our funding
guidelines generally limit the maximum principal amount of a purchased automobile contract to 125% of wholesale book value in the case
of used vehicles or to 125% of the manufacturer’s invoice in the case of new vehicles, plus, in each case, sales tax, licensing and, when
the customer purchases such additional items, a service contract or a product to supplement the customer’s casualty policy in the
event of a total loss of the related vehicle. We generally do not finance vehicles that are more than 15 model years old or have more
than 200,000 miles. The maximum term of a purchased contract is 78 months, although we consider the program, amount financed, and mileage
as significant factors in determining the maximum term of a contract. Automobile contract purchase criteria are subject to change from
time to time as circumstances may warrant. Prior to purchasing an automobile contract, our funding staff verify the customer’s employment,
income, residency, and credit information by contacting various parties noted on the customer’s application, credit information bureaus
and other sources. In addition, we contact each customer by telephone to confirm that the customer understands and agrees to the terms
of the related automobile contract. During this " welcome call, "
we also ask the customer a series of open-ended questions about his application and the contract, which may uncover potential misrepresentations.
Credit Scoring . We
use proprietary scoring models to assign two internal "credit scores" at the time the application is received. These proprietary
scores are used to help determine whether we want to approve the application and, if so, the program and pricing we will offer either
to the dealer, or in the case of our direct lending platform, directly to the customer. Our internal credit scores are based on a variety
of parameters including traditional and alternative credit history, data derived from other sources such as house/rental payment, length
of employment, residence stability and total income. When the dealer proposes a structure for the contract, our scores consider various
deal structure parameters such as down payment amount, loan to value, payment to income, make and model, vehicle class, and mileage. We
have developed our credit scores utilizing statistical risk management techniques and historical performance data from our managed portfolio.
We believe this improves our allocation of credit evaluation resources, enhances our competitiveness in the marketplace and manages the
risk inherent in the sub-prime market.
6
Characteristics of Contracts. All
the automobile contracts we purchase are fully amortizing and provide for level payments over the term of the automobile contract. All
automobile contracts may be prepaid at any time without penalty. The table below compares certain characteristics, at the time of origination,
of our contract purchases for the years ended December 31, 2024 and 2023:
Contracts Purchased During the Year Ended
December 31, 2024
December 31, 2023
Average Original Amount Financed
$ 21,931
$ 20,845
Weighted Average Original Term
71 months
67 months
Average Down Payment Percent
10.7%
10.7%
Average Vehicle Purchase Price
$ 20,499
$ 19,651
Average Age of Vehicle
7 years
7 years
Average Age of Customer
42 years
42 years
Average Time in Current Job
5 years
5 years
Average Household Annual Income
$ 74,655
$ 72,930
Dealer Compliance . The
dealer agreement and related assignment contain representations and warranties by the dealer that an application for state registration
of each financed vehicle, naming us as secured party with respect to the vehicle, was effected by the time of sale of the related automobile
contract to us, and that all necessary steps have been taken to obtain a perfected first priority security interest in each financed vehicle
in favor of us under the laws of the state in which the financed vehicle is registered. To the extent that we do not receive such state
registration within three months of purchasing the automobile contract, our dealer compliance group will work with the dealer to rectify
the situation. If these efforts are unsuccessful, we generally will require the dealer to repurchase the automobile contract.
Servicing and Collections
We currently service all automobile
contracts that we own as well as those automobile contracts we service for third parties. We organize our servicing activities based on
the tasks performed by our personnel. Our servicing activities consist of mailing monthly billing statements; contacting obligors whose
payments are late; accounting for and posting of all payments received; responding to customer inquiries; taking all necessary action
to maintain the security interest granted in the financed vehicle or other collateral; skip tracing; repossessing and liquidating the
collateral when necessary; collecting deficiency balances; and generally monitoring each automobile contract and the related collateral.
For contracts that we securitize, we are typically entitled to receive a base monthly servicing fee equal to 2.5% per annum computed as
a percentage of the declining outstanding principal balance of the non-charged-off automobile contracts . The servicing fee is included
in interest income for contracts that are pledged to a warehouse credit facility or a securitization transaction. For contracts we service
for third parties, we receive a base monthly servicing fee equal to 2.5%, and certain other incentive fees tied to credit performance.
Collection Procedures. We
believe that our ability to monitor performance and collect payments owed from sub-prime customers is primarily a function of our collection
approach and support systems. We believe that if payment problems are identified early and our collection staff works closely with customers
to address these problems, it is possible to correct many problems before they deteriorate further. To this end, we utilize pro-active
collection procedures, which include making early and frequent contact with delinquent customers; educating customers as to the importance
of making payments according to their contract schedule; and employing a consultative and customer service approach to assist the customer
in meeting his or her obligations, which includes attempting to identify the underlying causes of delinquency and cure them whenever possible.
In support of our collection activities, we maintain a computerized collection system specifically designed to service automobile contracts
with sub-prime customers. We engage a nearshore third-party call center to supplement the efforts the collectors in our five branch locations.
As of December 31, 2024, our nearshore partner had approximately 47 agents assigned to our portfolio.
7
We attempt to make telephonic
contact with delinquent customers from one to 20 days after their monthly payment due date, depending on our risk-based assessment of
the customer’s likelihood of payment during early stages of delinquency. If a customer has authorized us to do so, we may also send
automated text message reminders at various stages of delinquency and our collectors may also choose to contact a customer via text message
instead of, or in addition to, via telephone. Our customers can contact us via a toll-free number where they may choose to speak with
a collector or to use our automated voice response system to access information about their account or to make a payment. They may respond
to our collector’s text messages or chat with one of our collectors while logged into our website. Our contact priorities may be
based on the customers’ physical location, stage of delinquency, size of balance or other parameters. Our collectors inquire of the customer
the reason for the delinquency and when we can expect to receive the payment. The collector attempts to get the customer to make a payment
or a promise for the payment for a time generally not to exceed one week from the date of the call. If the customer makes such a promise,
the account is routed to a promise queue and is not contacted until the outcome of the promise is known. If the payment is made by the
promise date and the account is no longer delinquent, the account is routed out of the collection system. If the payment is not made,
or if the payment is made, but the account remains delinquent, the account is returned to a collector’s queue for subsequent contacts.
If a customer fails to make
or keep promises for payments, or if the customer is uncooperative or attempts to evade contact or hide the vehicle, a supervisor will
review the collection activity relating to the account to determine if repossession of the vehicle is warranted. Generally, such a decision
will occur between the 60th and 90th day past the customer’s payment due date, but could occur sooner or later, depending on the specific
circumstances. Contracts originated since January 2018 are accounted for at fair value and the economic impact of repossessions is incorporated
into the estimated net yield on those contracts. For contracts originated prior to January 2018, which are not accounted for at fair value,
we suspend interest accruals on contracts where the vehicle has been repossessed and reclassify the remaining automobile contract balance
to other assets. In addition, we apply a specific reserve to such contracts so that the net balance represents the estimated remaining
balance after the proceeds of the sale of the vehicle are applied, net of related costs.
If we elect to repossess the
vehicle, we assign the task to an independent national repossession service. Such services are licensed and/or bonded as required by law.
Upon repossession it is stored until it is picked up by a wholesale auction that we designate, where it is kept until sold. Prior to sale,
the customer has the right to redeem the vehicle by paying the contract in full. In some cases, we may return the vehicle to the customer
if they pay all, or what we deem to be a sufficient amount, of the past due amount. Financed vehicles that have been repossessed are generally
resold through unaffiliated automobile auctions, which are attended principally by car dealers. Net liquidation proceeds are applied to
the customer’s outstanding obligation under the automobile contract. Such proceeds usually are insufficient to pay the customer’s obligation
in full, resulting in a deficiency. In most cases we will continue to contact our customers to recover all or a portion of this deficiency
for up to several years after charge-off. From time to time, we sell certain charged off accounts to unaffiliated purchasers who specialize
in collecting such accounts.
Contracts originated since
January 2018 are accounted for at fair value and the economic impact of late payments is incorporated into the estimated net yield on
those contracts. For contracts originated prior to January 2018, which are not accounted for at fair value, we suspend interest accruals
on contracts once an automobile contract becomes greater than 90 days delinquent. We do not recognize additional interest income until
the borrower makes sufficient payments to be less than 90 days delinquent. Any payments received by a borrower, regardless of their stage
of delinquency are first applied to outstanding accrued interest and then to principal reduction.
We generally charge off the
balance of any contract by the earlier of the end of the month in which the automobile contract becomes five scheduled installments past
due or, in the case of repossessions, the month after we receive the proceeds from the liquidation of the financed vehicle or if the vehicle
has been in repossession inventory for more than three months. In the case of repossession, the amount of the charge-off is the difference
between the outstanding principal balance of the defaulted automobile contract and the net repossession sale proceeds.
Credit Experience
Our primary method of monitoring
ongoing credit quality of our portfolio is to closely review monthly delinquency, default and net charge off activity and the related
trends. Our internal credit performance data consistently show that new receivables have lower levels of delinquency and losses early
in their lives, with delinquencies increasing throughout their lives and incremental losses gradually increasing to a peak around 18
months, after which they gradually decrease. The weighted average seasoning of our total owned portfolio, represented in the tables below,
was 17 months, 19 months, and 17 months as of December 31, 2024, December 31, 2023, and December 31, 2022, respectively. Our financial
results are dependent on the performance of the automobile contracts in which we retain an ownership interest. Broad economic factors
such as recessions and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted
average age of the receivables at any given time. The tables below document the delinquency, repossession, and net credit loss experience
of all such automobile contracts that we own as of the respective dates shown.
8
Delinquency, Repossession
and Extension Experience
December 31, 2024
December 31, 2023
December 31, 2022
Number of
Number of
Number of
Contracts
Amount
Contracts
Amount
Contracts
Amount
Delinquency Experience
(Dollars in thousands)
Gross servicing portfolio (1)
201,441
$ 3,490,960
179,198
$ 2,970,066
170,658
$ 2,795,383
Period of delinquency (2)
31-60 days
14,643
243,068
13,337
210,200
13,434
201,764
61-90 days
7,244
114,633
6,717
104,144
5,481
80,146
91+ days
4,477
65,081
3,252
50,610
2,148
31,036
Total delinquencies (2)
26,364
422,782
23,306
364,954
21,063
312,946
Amount in repossession (3)
6,227
95,620
4,653
67,182
2,904
41,401
Total delinquencies and amount in repossession (2)
32,591
$ 518,402
27,959
$ 432,136
23,967
$ 354,347
Delinquencies as a percentage of gross servicing portfolio
13.1%
12.1%
13.0%
12.3%
12.3%
11.2%
Total delinquencies and amount in repossession as a percentage of gross servicing portfolio
16.2%
14.8%
15.6%
14.5%
14.0%
12.7%
Extension Experience
Contracts with one extension, accruing
33,623
$ 601,049
33,920
$ 610,617
27,584
$ 464,323
Contracts with two or more extensions, accruing
47,227
701,158
42,462
563,308
38,714
417,682
80,850
1,302,207
76,382
1,173,925
66,298
882,005
Contracts with one extension, non-accrual (4)
3,483
53,018
2,367
38,933
981
14,792
Contracts with two or more extensions, non-accrual (4)
4,052
60,660
2,081
27,497
1,485
15,395
7,535
113,678
4,448
66,430
2,466
30,187
Total accounts with extensions
88,385
$ 1,415,885
80,830
$ 1,240,355
68,764
$ 912,192
(1) All amounts and percentages
are based on the amount remaining to be repaid on each automobile contract. The information in the table represents the gross principal
amount of all automobile contracts we purchased, including automobile contracts we subsequently sold in securitization transactions that
we continue to service. The table does not include certain contracts we have serviced for third parties on which we earn servicing fees
only, and have no credit risk.
(2) We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following
due date, which date may have been extended within limits specified in the servicing agreements. The period of delinquency is based on
the number of days payments are contractually past due. Automobile contracts less than 31 days delinquent are not included. The delinquency
aging categories shown in the tables reflect the effect of extensions.
(3) Amount in repossession represents the contract balance on financed vehicles that have been repossessed but not yet liquidated.
(4) We do not recognize interest income on accounts past due more than 90 days.
9
Net Credit Loss Experience
(1)
Total Managed Portfolio
(Excludes Third Party Portfolio)
Year Ended December 31,
2024
2023
2022
(Dollars in thousands)
Average portfolio outstanding
$ 3,209,988
$ 2,913,571
$ 2,539,110
Net charge-offs as a percentage of average portfolio (2)
7.6%
6.5%
4.5%
(1) All amounts and percentages are based on the principal amount scheduled to be paid on each automobile contract contracts. The information
in the table represents all automobile contracts we service, excluding certain contracts we have serviced for third parties on which we
earn servicing fees only, and have no credit risk.
(2) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the liquidation of the
vehicle (excluding accrued and unpaid interest) and amounts collected after the date of charge-off, including some recoveries which have
been classified as other income in the accompanying financial statements.
Extensions
In certain circumstances we
will grant obligors one-month payment extensions to assist them with temporary cash flow problems. In general, an obligor will not be
permitted more than two such extensions in any 12-month period and no more than eight over the life of the contract. The only modification
of terms is to advance the obligor’s next due date, generally by one month, though in some cases we may permit a longer extension,
and in any case an advance in the maturity date corresponding to the advance of the due date. There are no other concessions such as a
reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant
delays in payments.
The basic question in deciding to grant an extension
is whether we will (a) be delaying an inevitable repossession and liquidation or (b) risk losing the vehicle as a result of not being
able to locate the obligor and vehicle. In both of those situations, the loss would likely be higher than if the vehicle had been repossessed
without the extension. The benefits of granting an extension include minimizing current losses and delinquencies, minimizing lifetime
losses, getting the obligor’s account current (or close to it) and building goodwill with the obligor so that he might prioritize
us over other creditors on future payments. Our servicing staff are trained to identify when a past due obligor is facing a temporary
problem that may be resolved with an extension.
The credit assessment for granting an extension
is initially made by our collector, who bases the recommendation on the collector’s discussions with the obligor. In such assessments
the collector will consider, among other things, the following factors: (1) the reason the obligor has fallen behind in payments; (2)
whether or not the reason for the delinquency is temporary, and if it is, have conditions changed such that the obligor can begin making
regular monthly payments again after the extension; (3) the obligor’s past payment history, including past extensions if applicable; and
(4) the obligor’s willingness to communicate and cooperate on resolving the delinquency. If the collector believes the obligor is
a good candidate for an extension, he must obtain approval from his supervisor, who will review the same factors stated above prior to
offering the extension to the obligor. During 2020 we incorporated an algorithmic extension score card which provides our staff with an
objective and quantitative assessment of whether or not a obligor is a good candidate for an extension, based on the current circumstances
of the account. The extension score card was developed by our internal risk management team and is derived from the post-extension performance
of accounts in our managed portfolio.
10
After receiving an extension,
an account remains subject to our normal policies and procedures for interest accrual, reporting delinquency and recognizing charge-offs.
We believe that a prudent extension program is an integral component to mitigating losses in our portfolio of sub-prime automobile receivables.
The table below summarizes the status, as of December 31, 2024, for accounts that received extensions from 2013 through 2023:
Period of Extension
# of Extensions Granted
Active or Paid Off at December 31, 2024
% Active or Paid Off at December 31, 2024
Charged Off > 6 Months After Extension
% Charged Off > 6 Months After Extension
Charged Off <= 6 Months After Extension
% Charged Off <= 6 Months After Extension
Avg Months to Charge Off Post Extension
2013
23,398
11,131
47.6%
11,282
48.2%
985
4.2%
23
2014
25,773
10,423
40.4%
14,485
56.2%
865
3.4%
25
2015
53,319
21,965
41.2%
30,051
56.4%
1,303
2.4%
26
2016
80,897
35,108
43.4%
42,954
53.1%
2,835
3.5%
26
2017
133,847
55,504
41.5%
68,124
50.9%
10,219
7.6%
23
2018
121,531
57,265
47.1%
53,268
43.8%
10,998
9.0%
20
2019
71,548
42,621
59.6%
22,507
31.5%
6,420
9.0%
19
2020
83,170
56,198
67.6%
23,305
28.0%
3,667
4.4%
21
2021
47,010
33,486
71.2%
12,288
26.1%
1,236
2.6%
19
2022
56,142
39,610
70.6%
14,578
26.0%
1,954
3.5%
15
2023
83,113
65,309
78.6%
14,545
17.5%
3,259
3.9%
11
We view these results as a
confirmation of the effectiveness of our extension program. We consider accounts that have had extensions and were active or paid off
as of December 31, 2024 to be successful. Successful extensions result in continued payments of interest and principal (including payment
in full in many cases). Without the extension, however, the account may have defaulted, and we would have likely incurred a substantial
loss and no additional interest revenue.
For extension accounts that
ultimately charged off, we consider accounts that charged off more than six months after the extension to be at least partially successful.
In such cases, despite the ultimate loss, we received additional payments of principal and interest that otherwise we would not have
received.
Additional information about our extensions is provided in the tables
below:
For the Year Ended
December 31, 2024
December 31, 2023
December 31, 2022
Average number of extensions granted per month
7,540
6,926
4,689
Average number of outstanding accounts
189,460
176,438
162,264
Average monthly extensions as % of average outstandings
4.0%
3.9%
2.9%
11
December 31, 2024
December 31, 2023
December 31, 2022
Number of Contracts
Amount
Number of Contracts
Amount
Number of Contracts
Amount
(Dollars in thousands)
Contracts with one extension
37,106
$ 654,067
36,287
$ 649,551
28,565
$ 479,114
Contracts with two extensions
22,452
382,301
19,335
326,552
13,730
180,547
Contracts with three extensions
13,300
214,194
10,109
133,207
9,837
108,986
Contracts with four extensions
7,462
99,071
6,784
67,735
7,938
76,220
Contracts with five extensions
4,645
43,264
5,197
42,734
5,425
45,519
Contracts with six extensions
3,420
22,988
3,118
20,576
3,269
21,806
88,385
$ 1,415,885
80,830
$ 1,240,355
68,764
$ 912,192
Gross servicing portfolio (Excludes Third Party Portfolio)
201,441
$ 3,490,960
179,198
$ 2,970,066
170,658
$ 2,795,383
Non-Accrual Receivables
It is not uncommon for our
obligors to fall behind in their payments. However, with the diligent efforts of our servicing staff and systems for managing our collection
efforts, we regularly work with our customers to resolve delinquencies. Our staff is trained to employ a counseling approach to assist
our customers with their cash flow management skills and help them to prioritize their payment obligations to avoid losing their vehicle
to repossession. Through our experience, we have learned that once a contract becomes greater than 90 days past due, it is more likely
than not that the delinquency will not be resolved and will ultimately result in a charge-off. Contracts originated since January 2018
are accounted for at fair value and the economic impact of late payments is incorporated into the estimated net yield on those contracts.
If an obligor exceeds the
90 days past due threshold at the end of one period, and then makes the necessary payments such that it becomes equal to or below 90 days
delinquent at the end of a subsequent period, the related contract would be restored to full accrual status for our financial reporting
purposes. At the time a contract is restored to full accrual in this manner, there can be no assurance that full repayment of interest
and principal will ultimately be made. However, we monitor each obligor’s payment performance and are aware of the severity of his
delinquency at any time. The fact that the delinquency has been reduced below the 90-day threshold is a positive indicator. Should the
contract again exceed the 90-day delinquency level at the end of any reporting period, it would again be reflected as a non-accrual account.
Our policy for placing a contract
on non-accrual status is independent of our policy to grant an extension. In practice, it would be an uncommon circumstance where an extension
was granted and the account remained in a non-accrual status, since the goal of the extension is to bring the contract current (or nearly
current).
Securitization of Automobile Contracts
Throughout the period for which
information is presented in this report, we have purchased automobile contracts with the intention of financing them on a long-term basis
through securitizations, and on an interim basis through warehouse credit facilities. All such financings have involved identification
of specific automobile contracts, sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries,
and issuance of asset-backed securities to be purchased by institutional investors. Depending on the structure, these transactions may
be accounted for under generally accepted accounting principles as sales of the automobile contracts or as secured financings.
12
When structured to be treated
as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and
the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize
interest and fee income on the contracts, (ii) recognize interest expense on the securities issued in the transaction and (iii) record
as expense a provision for credit losses on the contracts. Effective January 1, 2018, we adopted the fair value method of accounting for
finance receivables acquired on or after that date. For these receivables, we recognize interest income on a level yield basis using that
internal rate of return as the applicable interest rate. We do not record an expense for provision for credit losses on these receivables
because such credit losses are included in our computation of the appropriate level yield.
Since 1994 we have conducted
103 term securitizations of automobile contracts that we originated under our regular programs. As of December 31, 2024, 17 of those securitizations
are active and all are structured as secured financings. We generally conduct our securitizations on a quarterly basis, near the beginning
of each calendar quarter, resulting in four securitizations per calendar year. However, we completed only three securitizations in 2020.
In April 2020 we postponed our planned securitization due to the onset of the pandemic and the effective closure of the capital markets
in which our securitizations are executed. Subsequently we successfully completed securitizations in June and September 2020.
Our recent history of term securitizations is summarized
in the table below:
Recent Asset-Backed Securitizations
$ in thousands
Period
Number of Term
Securitizations
Amount of
Receivables
2018
4
883,452
2019
4
1,014,124
2020
3
741,867
2021
4
1,145,002
2022
4
1,537,383
2023
4
1,352,114
2024
4
1,533,854
From time to time we have
also completed financings of our residual interests in other securitizations that we and our affiliates previously sponsored. On June
30, 2021, we completed a $50.0 million securitization of residual interests from previously issued securitizations. In this residual interest
financing transaction, qualified institutional buyers purchased $50.0 million of asset-backed notes secured by residual interests in three
CPS securitizations consecutively conducted from January 2018 through July 2018, and an 80% interest in a CPS affiliate that owns the
residual interests in the eight CPS securitizations conducted from October 2018 through September 2020. As of December 31, 2024, the notes
had a principal balance of $50.0 million.
On March 31, 2024, we completed
a new residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. In
this residual interest financing transaction, qualified institutional buyer purchased $50.0 million of asset-backed notes secured by an
80% interest in a CPS affiliate that owns the residual interests in five CPS securitizations issued from January 2022 through January
2023. The sold notes (“2024-1 Notes”), issued by CPS Auto Securitization Trust 2024-1, consist of a single class with a coupon
of 11.50%. As of December 31, 2024, the notes had a principal balance of $50.0 million.
Generally, prior to a securitization
transaction we fund our automobile contract acquisitions primarily with proceeds from warehouse credit facilities. Our current short-term
funding capacity is $535 million, comprising two credit facilities. The first credit facility was established in May 2012. This facility
was most recently renewed in July 2024, extending the revolving period to July 2026, with an optional amortization period through July
2027. In addition, the capacity was increased from $200 million to $335 million in December 2024.
13
In November 2015, we entered
into another $100 million facility. In June 2022, we increased the capacity of our credit agreement with Ares Agent Services, L.P. from
$100 million to $200 million. This facility was most recently renewed in March 2024, extending the revolving period to March 2026, followed
by an amortization period to March 2028.
In a securitization and in
our warehouse credit facilities, we are required to make certain representations and warranties, which are generally similar to the representations
and warranties made by dealers in connection with our purchase of the automobile contracts. If we breach any of our representations or
warranties, we may be required to repurchase the automobile contract at a price equal to the principal balance plus accrued and unpaid
interest. We may then be entitled under the terms of our dealer agreement to require the selling dealer to repurchase the contract at
a price equal to our purchase price, less any principal payments made by the customer. Subject to any recourse against dealers, we will
bear the risk of loss on repossession and resale of vehicles under automobile contracts that we repurchase.
Whether a securitization is
treated as a secured financing or as a sale for financial accounting purposes, the related special purpose subsidiary may be unable to
release excess cash to us if the credit performance of the securitized automobile contracts falls short of pre-determined standards. Such
releases represent a material portion of the cash that we use to fund our operations. An unexpected deterioration in the performance of
securitized automobile contracts could therefore have a material adverse effect on both our liquidity and results of operations, regardless
of whether such automobile contracts are treated as having been sold or as having been financed.
Certain of our securitization
transactions and our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios and results.
Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain
securitization and non-securitization related debt contain cross-default provisions that would allow certain creditors to declare a default
if a default occurred under a different facility. As of December 31, 2024, we were in compliance with all such covenants.
Competition
The automobile financing business
is highly competitive. We compete with several national, regional and local finance companies with operations similar to ours. In addition,
competitors or potential competitors include other types of financial services companies, such as banks, leasing companies, credit unions
providing retail loan financing and lease financing for new and used vehicles, and captive finance companies affiliated with major automobile
manufacturers. Many of our competitors and potential competitors possess substantially greater financial, sales, technical, personnel
and other resources than we do. Moreover, our future profitability will be directly related to the availability and cost of our capital
in relation to the availability and cost of capital to our competitors. Our competitors and potential competitors include far larger,
more established companies that have access to capital markets for unsecured commercial paper and investment grade-rated debt instruments
and to other funding sources that may be unavailable to us. Many of these companies also have long-standing relationships with dealers
and may provide other financing to dealers, including floor plan financing for the dealers’ purchase of automobiles from manufacturers,
which we do not offer.
We believe that the principal
competitive factors affecting a dealer’s decision to offer automobile contracts for sale to a particular financing source are the monthly
payment amount made available to the dealer’s customer, the purchase price offered for the automobile contracts, the timeliness
of the response to the dealer upon submission of the initial application, the amount of required documentation, the consistency and timeliness
of purchases and the financial stability of the funding source. While we believe that we can obtain from dealers sufficient automobile
contracts for purchase at attractive prices by consistently applying reasonable underwriting criteria and making timely purchases of qualifying
automobile contracts, there can be no assurance that we will do so.
14
Regulation
Numerous federal and state
consumer protection laws, including the federal Truth-In-Lending Act, the federal Equal Credit Opportunity Act, the federal Fair
Debt Collection Practices Act and the Federal Trade Commission Act, regulate consumer credit transactions. These laws mandate certain
disclosures with respect to finance charges on automobile contracts and impose certain other restrictions. In most states, a license is
required to engage in the business of purchasing automobile contracts from dealers. In addition, laws in a number of states impose limitations
on the amount of finance charges that may be charged by dealers on credit sales. The so-called Lemon Laws enacted by various states provide
certain rights to purchasers with respect to automobiles that fail to satisfy express warranties. The application of Lemon Laws or violation
of such other federal and state laws may give rise to a claim or defense of a customer against a dealer and its assignees, including us
and those who purchase automobile contracts from us. The dealer agreement contains representations by the dealer that, as of the date
of assignment of automobile contracts, no such claims or defenses have been asserted or threatened with respect to the automobile contracts
and that all requirements of such federal and state laws have been complied with in all material respects. Although a dealer would be
obligated to repurchase automobile contracts that involve a breach of such warranty, there can be no assurance that the dealer will have
the financial resources to satisfy its repurchase obligations. Certain of these laws also regulate our servicing activities, including
our methods of collection.
We are subject to supervision
and examination by the Consumer Financial Protection Bureau (the “CFPB”), a federal agency created by the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The CFPB has rulemaking, supervisory and enforcement authority
over “non-banks,” including us. The CFPB is specifically authorized, among other things, to take actions to prevent companies
from engaging in “unfair, deceptive or abusive” acts or practices in connection with consumer financial products and services,
and to issue rules requiring enhanced disclosures for consumer financial products or services. The CFPB also has authority
to interpret, enforce and issue regulations implementing enumerated consumer laws, including certain laws that apply to us.
The Dodd-Frank Act and related
regulations are likely to affect our cost of doing business, may limit or expand our permissible activities, may affect the competitive
balance within our industry and market areas and could have a material adverse effect on us.
In addition to the CFPB, other
state and federal agencies have the ability to regulate aspects of our business. For example, the Dodd-Frank Act provides a mechanism
for state Attorneys General to investigate us. In addition, the Federal Trade Commission has jurisdiction to investigate aspects of our
business. We expect that regulatory investigation by both state and federal agencies will continue, and there can be no assurance that
the results of such investigations will not have a material adverse effect on us.
We believe that we are currently
in material compliance with applicable statutes and regulations; however, there can be no assurance that we are correct, nor that we will
be able to maintain such compliance. The past or future failure to comply with applicable statutes and regulations could have a material
adverse effect on us. Furthermore, the adoption of additional statutes and regulations, changes in the interpretation and enforcement
of current statutes and regulations or the expansion of our business into jurisdictions that have adopted more stringent regulatory requirements
than those in which we currently conduct business could have a material adverse effect on us. In addition, due to the consumer-oriented
nature of our industry and the application of certain laws and regulations, industry participants are regularly named as defendants in
litigation involving alleged violations of federal and state laws and regulations and consumer law torts, including fraud. Many of these
actions involve alleged violations of consumer protection laws. A significant judgment against us or within the industry in connection
with any such litigation could have a material adverse effect on our financial condition, results of operations or liquidity.
Human Capital
We rely on our employees for
everything we do. To make our business work, we seek to supply employees with the tools and knowledge they need to succeed. In addition
to new hire training, we provide mentor programs and management workshops. We offer an education costs assistance program to help with
college tuition and costs incurred to obtain job related certifications and licenses.
15
Workforce Allocation and
Diversity We had 933 employees as of December 31, 2024. Our employee population was 67% female, and 71% self-identified as ethnically
diverse (defined as all EEOC classifications other than white). Broken out by function, our human capital was allocated thus: 14 were
senior management personnel; 552 were servicing personnel; 195 were automobile contract origination personnel; 122 were sales personnel;
50 were various administrative personnel including human resources, legal, accounting and systems.
Compensation and benefits
We offer a total rewards package, which includes competitive compensation, incentives, and comprehensive benefits that will attract, retain,
and motivate talent within our organization. Our compensation and benefits package includes competitive pay, healthcare, mental health,
retirement benefits, as well as paid time off and holidays, disability benefits, and volunteer time off, along with other benefits and
employee resources. We offer performance pay to help enhance career development.
Employee Engagement
Our means of evaluating our human capital resources include, on an individual basis, annual performance reviews and annual meetings with
senior management on or close to the employee’s anniversary date. Most departments meet one-on-one with employees monthly
to discuss performance, suggestions, and concerns. On an aggregate basis, we distribute new hire surveys and host department round table
meetings. The feedback from the meetings and survey results are reviewed by senior management and used to assist in reviewing our human
capital strategies, programs, and practices. Our COO holds town hall meetings to provide company-wide updates and conduct open Q&A
for all employees. We foster collaboration through charity committees which plan events to raise funds and/or provide resources to various
501(c)(3) organizations in our communities. We also offer paid community service time. Metrics used in human capital management include
average employee tenure and annual turnover rate. We believe that our relations with our employees are good. We are not a party to any
collective bargaining agreement.
Available Information
Our internet address is www.consumerportfolio.com .
We make available free of charge on our internet web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission.