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CPSS explains how their business will recover

|Includes: Consumer Portfolio Services, Inc. (CPSS)

CPS Inc. are a subprime auto lender that got crushed in the recession. I came across an interesting paragraph in their Q310 report, which describes the ongoing process of extracting themselves from the credit crunch

Our plan for future operations and meeting the obligations of our financing arrangements includes returning to profitability by gradually increasing the amount of our contract purchases with the goal of increasing the balance of our outstanding managed portfolio. Our plans also include financing future contract purchases with credit facilities and term securitizations that offer a lower overall cost of funds compared to our current facilities.

To illustrate, in the last six months of 2009 we purchased $6.1 million in contracts and our sole credit facility had a minimum interest rate of 14.00% per annum. By comparison, in the first nine months of 2010, we purchased $79.4 million in contracts and entered into the $50 million term funding facility which has an interest rate of 11.00% per annum and the ability to decrease such rate to 9.00% per annum if certain conditions are met.

Moreover, the weighted average effective coupon of our September 2010 securitization was 3.21% and did not include a financial guaranty policy. This transaction demonstrates our ability to access the lower cost of funds available in the current market environment without the financial guaranties we historically incorporated into our term securitization structures. In addition, less competition in the auto financing marketplace has resulted in better terms for our recent contract purchases compared to prior years.

For the first nine months of 2010 and the years ended December 31, 2009, 2008 and 2007, the average acquisition fee we charged per automobile contract purchased under our CPS programs was $1,405, $1,508, $592 and $209, respectively, or 9.5%, 11.7%, 3.9% and 1.4%, respectively, of the amount financed. Similarly, the weighted average annual percentage rate of interest payable by our customers on newly purchased contracts has increased significantly to 20.06% for the first nine months of 2010 from 19.9%, 18.5%, and 18.1% in 2009, 2008 and 2007, respectively.

At that time they had 2x $50m credit facilities, one at 14% and one at 11%. They now have an extra $200m warehouse line of credit at LIBOR+6% (min. 6.5%).

With very low interest rates they can securitize at 3-4% and charge their customers an average 20.2%, as well as charging a $1400 acquisition fee. That seems like a very good business to me. I think the improvement in their outlook has been overlooked because the stock is not followed by analysts and the trading volume is very low.