CompuCredit Corp. said the cost of defending itself against federal lawsuits over its marketing practices and a related dispute with a debt buyer helped its second-quarter loss quadruple from a year earlier.

However, the Atlanta marketer of subprime credit cards also reported a decline in delinquencies. Chargeoffs surged, but it said it expects them to fall for the rest of the year.

David Hanna, CompuCredit's chairman and chief executive, said on a conference call with investors Tuesday evening that the regulators' suits "have damaged us from a profitability perspective."


The suits, which the Federal Trade Commission and the Federal Deposit Insurance Corp. filed in June, accuse CompuCredit of deceptive marketing practices. The FDIC's suit, which also lists two of the card marketer's bank partners as defendants, is seeking $150 million of restitution from CompuCredit.


Last month, Encore Capital Group of San Diego, which had been a regular purchaser of charged-off card receivables from CompuCredit's Jefferson Capital Systems, said the suits had put CompuCredit in breach of their agreement. CompuCredit said that Encore had breached the agreement, in part because it did not make a scheduled purchase. The dispute is being arbitrated.


Hanna reiterated Tuesday that the regulators' claims are "unfounded and without merit, and we will vigorously contest them."


J. Paul Whitehead 3rd, CompuCredit's chief financial officer, said on the call that the legal wrangling could prove an obstacle to ongoing cost-cutting measures.


"The only wild card we see around our ability to significantly reduce our expenses in our operating ratio in the near future are the increased litigation costs we currently are incurring," he said.


Hanna said that Encore's halting of debt purchases had reduced recoveries — and profits — at Jefferson and will probably continue to do so "until this matter is resolved in our favor."


CompuCredit's marketing costs fell more than 65%, to $17 million. Hanna said that his company's marketing activity has been "at a reduced level since late August of last year," and that more cutbacks were coming.


"As such, we expect further reductions in our receivables levels and a diminishment of activity levels in general, which allows us to cut many other areas of cost and overhead," he said.
CompuCredit's chargeoff rate rose more than 10 percentage points from a year earlier, to 19.2%, but its 60-plus-day delinquency rate fell 80 basis points, to 12.6%.


Whitehead said that in the middle of last year CompuCredit originated a record number of "lower-tier" card accounts that reached their peak chargeoff period by the end of the second quarter. As a result, "we expect significant reductions in our chargeoff rates for the remainder of this year."


All told, CompuCredit lost $44.9 million, or 96 cents a share. On a managed basis — including securitized receivables along with those on the balance sheet — but excluding discontinued operations, CompuCredit swung to a loss of $98.9 million, or $2.11 a share, from a profit of $15.8 million, or 32 cents a share, a year earlier.


By midafternoon Wednesday, CompuCredit's stock had dropped about 5% from Tuesday's close.

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