| LAGUNA BEACH May 30, 2010 VOLUME XII |
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News & Views
Debt Buyers & Sellers Resource
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Editor's Message
On Memorial Day we pause to remember those who have paid the ulitmate price in sacrificing their lives to protect our freedoms, and that kind of heroism, intended or not, demonstrates the kind of integrity that once was the standard in America.
In this issue, Gary steps right into the ring on the subject of integrity in Whatever Happened to Intergrity, as it has been a chronic problem in our industry. In addition to the monthly charge-off rates for April, we also have a piece on what the real value of charge-offs are, in So what is all this Charged-off Debt Really Worth? For those who are interested, Gary has outlined what is involved in Buying From the FDIC, and in Green Pea Corner he covers the loan type breakdown of the entire Collection Industry, in Credit Card Debt Represents Small Portion of Collection Industry.
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Whatever Happened to Integrity
by Gary Baker
We have written about a great number of topics over the past year for this newsletter. Generally the articles are long and technical and are based on a great deal of research. Since we are very comfortable generating technical writing and performing the requisite research, we have tended not to talk much about other aspects of this business, which are at least important as the information which we usually produce.
While this may be uncomfortable territory for me, I believe that it is very important that we spend some time this issue, and talk about ethics and integrity. Perhaps it might be far more accurate to say the lack of integrity.
Someone told me that we are "ethically challenged" as an industry and while that label may not apply to all, it is true enough to warrant a little investigation. We are routinely made aware of significant problems that exist at every level of this industry. Not just with the collectors and lawyers, but also with the brokers and sellers at all levels, including the issuers. If we are not able to police our own, why should we then wonder or complain about the regulators finally stepping in and doing the job for us.
Since the industry representatives at the DBA and ACA are not a police force, there is no one really to be accountable to, so integrity and eithical business practices, typically trail well behind profits, in the standard way members of this industry operate. If we continue down this path into the future, then it is not much of a leap to imagine that the time will soon be upon us, wherein every state might deem it appropriate to take measures to protect their citizens from all people in the ARM industry. While that would make our job much more difficult, it would certainly not bode well for the issuers of credit or ultimately the consumer who will pay more to borrow money, either. But with so many infractions and the lack of ethical behavior at every level, who could really blame the lawmakers, from making such sweeping changes.
The media adds more fuel to the fire by taking even the most innocent of mistakes and
and then fans the flames by blowing the issue out of proportion. And the politicians, who are generally more interested in their campaigns and public image then resolving problems, gain more press making new laws instead of enforcing the old ones.
We know that bad debt lawsuits are clogging the courts. Collection agencies are getting caught threatening the consumers and other collectors are getting sued for even the slightest FDCPA infringement, sometimes over minor technicalities rather than actual abuses. An entire cottage industry has sprung up to provide information to people on how to avoid paying their debt. Files are being sold by people who don't even own them. Brokers are manipulating files and misrepresenting them on a regular basis. Banks are awarding sales to the highest bidder, and then changing their mind more than a day following the sale, when a late bidder comes in with a higher offer. Thousands of new buyers are being suckered into the business by seminar promoters who color the business as one that will generate great wealth virtually overnight, using other people's money.
The issue of ethics and integrity is certainly not limited to the debt and collections business. Just yesterday, on one of the Linked-In sites for Venture Capital was the following posting: "Is it ever OK to cook the books and if so how much can you get away with?" Unbelievable, I know, but there it was. Have we really lost our way to that degree? Are we so jaded that this kind of behavior hardly phases us? Will there ever be a return to the standards we all grew up with? Or, is this just a taste of what is to come in the future?
In a survey by U.S. News and World Report: 80% of "high achieving" high school students admit to cheating. 51% of high school students did not believe it was wrong. 95% of cheating high school students said they had not been detected. 75% of college students admitted cheating and almost 85% of college students said cheating was necessary to get ahead.
What is Integrity
According to Wikipedia, Integrity is a concept of consistency of actions, values, methods, measures, principles, expectations and outcomes. In Christian ethics, integrity is regarded as the quality of having an intuitive sense of honesty and truthfulness in regard to the motivations for one's actions. Integrity can be regarded as the opposite of hypocrisy, in that it regards internal consistency as a virtue, and suggests that parties holding apparently conflicting values should account for the discrepancy or alter their beliefs.
The word "integrity" stems from the Latin adjective integer (whole, complete). In this context, integrity is the inner sense of "wholeness" deriving from qualities such as honesty and consistency of character. As such, one may judge that others "have integrity" to the extent that one judges whether they behave according to the values, beliefs and principles they claim to hold.
In common public usage, people sometimes use the word "integrity" in reference to a single "absolute" morality rather than in reference to the assumptions of the value system in question. In an absolute context, the word "integrity" conveys no meaning between people with differing definitions of absolute morality, and becomes nothing more than a vague assertion of perceived political correctness or popularity, similar to using terms such as "good" or "ethical" in a moralistic context.
Why Should We Care
Without a strong moral compass, we are probably doomed as a free society. If we are unable to conduct ourselves in a manner that is acceptable to our peers, laws and regulations will be created to force compliance with someone's view of what is acceptable behavior. We will lose more and more freedoms and we will pay more for the new regulations. Our business practices will be dictated further by lawmakers and there will be no turning back.
We should not want our customers to be called our victims. We should observe that the hand writing is now on the wall, and recognize that if we are not able to save ourselves from each other, there will be those that step in and try to save us from ourselves.
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DEFAULT JUDGMENT STATISTICS
According to a recent article in the New York Times, collection law firms operate under a different business model than traditional law firms as they do not bill an hourly rate for their work and only get paid when they collect. Collection attorneys bring many lawsuits through the courts each year and according to estimates between 75 and 80% of the debtors in these cases never respond to their lawsuits and 95% of those suits result in default judgments. The Federal Trade Commission which oversees the debt collection industry actually puts the non-response rate by the debtor closer to 95%.
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Credit Card Charge-offs for April
We have seen a flattening out of credit card charge-offs in 2010 with the industry wide numbers holding at about 11%. This is about 0.4% lower than the year ago figures, and some analysts believe that the charge-off rates have already peaked. While the worst may be behind us, we must bear in mind that the unemployment rate has probably not yet reached the highs that have been forecasted, which may occur later this year.
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So What is All This Charged-off Debt Really Worth?
The question of the value of this charged-off debt lies probably in the eyes of the beholder. Depending on your point of view, the value of the debt, may be established by the debt buyer by how much can be recovered during collections, or by the IRS who gives credit for the total value of the debt at face value for the bank. Or perhaps the real value of the charged-off accounts is the value that the original issuer is carrying the unsold debt on their books.
The market place is where we find the buyer, and when the products are scarce, the prices tend to rise. But if we look at how the issuer values the product, we may find a more accurate true value of the accounts that have been written off. The largest issuer was Bank of America, and in 2009 they charged-off $19.2 billion of accounts, of which $6.75 billion were owned by B of A and the balance, were managed accounts. After reading the entire 221 page annual report for 2009, we found that Bank of America looked to recover $206 million of these charge-offs, which works out to be 3.05%. It is not stated how the recovery would occur, either by collections and / or sales.
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U.S. DEBT CLOCK
If you haven't had a chance to check this out it's a real eye opener. It's a running clock of the US debt relative to revenues streams, and it includes a moment by moment snap shot of the detailed breakdown of a variety of budgetary items including Social Security, Defense spending, Foreign Trade numbers and money created by the Federal Reserve. Note that Credit Card Debt is falling.
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Buying From the FDIC
by Gary Baker
The FDIC www.fdic.gov generally acts as the receiver for the assets that were held by failing banks. When FDIC has loans available for sale they are assigned to one of the five loan sale advisors and the loans are marketed on their respective websites. The loan sale advisors will provide approved bidders information on the loan pool(s) being offered for sale. Each advisor has the ability to offer both electronic due diligence on their website and hard copy due diligence. Each of their websites has an internet bid platform where bids on FDIC loan sales are submitted.
For those interested in participating in a loan sale offering, the FDIC website recommends that you contact each of the loan sale advisors and request an account on their web site. Each advisor has their own requirements for granting access to their site.
Types of offerings are generally commercial real estate ranging from $10 million to $250 million. There are a few consumer loans with the smallest offered at about $50 million and there are some international loans. Many of the loans that are available are a combination of performing and non-performing loans. To participate in these purchases, the buyer will need to demonstrate an ability to service the performing loans we understand.
In general, about 30% of the offerings are consumer loans, which include credit card, student loans, boats, timeshares, credit card receivables, charge-offs, judgments, deficiencies (i.e. auto), consumer and real estate related. About 35% are commercial real state loans, multi-family, office retail, industrial, hotel, agriculture, REO, recreational, congregate care. 30% are commercial - other, which include assigned notes, stock securities, FF&E, leases, unsecured letters of credit, accounts receivable, partnership interests and leaseholds, land both improved and unimproved, construction, land contracts, farm commercial, residential, and REO. The last 5% are single family 1 to 4 units, conventional, FHV/VA, condos, junior liens, CO-OPS REO.
To participate in the FDIC sales, each buyer must be registered. The registration process is the same with each broker for FDIC sales. The FDIC offerings have two levels of information access: Level 1 - summary level information and Level 2 - personal identifying information detail that may be necessary for your evaluation of the loans. The Level 1 information consists of a confidentiality agreement, purchaser eligibility certificate questionnaire and other information which may be required for certain loans. Access to Level 2 PII Level Detail Information, is provided only to approved registrants.
In order to have access to Level 2 Loan Information containing PII, you will be required to pay an annual Registration Processing Fee of $500 (unless you are a federally insured bank or GSE). You will be required to make certain legally binding representations about your background, financial condition, qualifications and experience.
The Registration Process will ask you to complete detailed information as follows:
- Prior bid(2) and purchase(1) experience of loans in secondary market
- FDIC Security Deposit Agreement and $50,000 Security Deposit (Refundable)
- Annual $500 Registration Processing Fee (Non-Refundable)
- Type of Company
- Tangible net worth of $1,000,000
- Tax ID or SSN
- Date of Formation
- FDIC Bidder Registration Number, if available
- Names / Addresses of Owners
- Basic Financial Information
- Professional References - Banker, Lawyer and Accountant
- Electronic Copies of Articles of Incorporation, Organization, Partnership or similar documentation
In additionally, there is a list of purchaser eligibility requirements that must by complied with.
Note: This is not part of the FDIC Registration Process. However, you should not register if you would be unable to sign the PEC.
You may not be eligible to bid on FDIC assets if the answer by you to any of the following questions is 'YES'. The actual detailed questions are contained in the Purchaser Eligibility Certification, which will be available with the sale materials for each sale. The PEC will generally include the following:
- Is the prospective purchaser an FDIC employee or related to an FDIC employee.
- Is the prospective purchaser or any of its affiliates, a contractor to supply services to the FDIC or submitted a bid to the FDIC to become a contractor to supply services within the last 3 years?
- Is the prospective purchaser, or any of its affiliates, more than 60 days delinquent on a debt (higher than $50,000) or other obligation currently held by the FDIC?
- Has the prospective purchaser, or any of its affiliates, been an officer or director of a failed banking institution who has caused a Substantial Loss to such failed banking institution?
- Has the prospective purchaser, or any of its affiliates, been prohibited by a federal banking regulator from participating in the affairs of a failed banking institution?
- Has the prospective purchaser, or any of its affiliates, been involved in a scheme of more than one borrowing or guarantor transactions intended to cause a Substantial Loss to a financial banking institution and did cause a substantial loss to a failed banking institution?
- Has the prospective purchaser, or any of its affiliates, been convicted of These Specified Crimes AND defaulted on a debt or guaranty owed to the FDIC or a failed banking institution to the extent that a judgment was rendered in favor of the FDIC?
- Has the prospective purchaser defaulted on a debt of more than $1 million in connection with seller financing provided by the FDIC?
- Has the identity or form or any other contractual arrangements of the prospective purchaser been created with the intent to hide or disguise the fact that an otherwise ineligible prospective purchaser is intended to benefit from the potential purchase of assets from the FDIC?
Notice Concerning Legal Action
Any person who knowingly or willfully makes false or fraudulent statements or disclosures in connection with this Certification will be referred to the Office of Inspector General and/or the appropriate law enforcement officials for investigation and legal enforcement and may be subject to fines and/or imprisonment (18 U.S.C. §§ 1001, 1007 and 1014).
Summary
The process of buying assets from the FDIC appears to be geared towards banks, institutional investors and large investor funds. The offerings are generally larger than most individuals or businesses can handle alone and pooling of assets to acquire these offerings would require that every member be qualified to purchase, and can be compliant on all of the requirements. Penalties are steep for misrepresentations, and as anyone knows who has tried working with a bunch of individual investors, getting accurate information can be a challenge.
The FDIC also offers a link to residential real estate for sale. You enter the price range and location that you are interested in, and a list of properties is displayed. When you click on the property of interest a brief description is shown as well as the real estate agent that is locally handling the sale of the property.
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BAR STOOL ECONOMICS
By David R. Kamerschen, Ph.D, Professor of Economics, Unversity of Georgia
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
* The first four men (the poorest) would pay nothing.
* The fifth would pay $1.
* The sixth would pay $3.
* The seventh would pay $7.
* The eighth would pay $12.
* The ninth would pay $18.
* The tenth man (the richest) would pay $59.
So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers", he said, "I'm going to reduce the cost of your daily beer by $20". Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his "fair share?"
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
*The fifth man, like the first four, now paid nothing (100% savings).
* The sixth now paid $2 instead of $3 (33%savings).
* The seventh now pay $5 instead of $7 (28%savings).
* The eighth now paid $9 instead of $12 (25% savings).
* The ninth now paid $14 instead of $18 (22% savings).
* The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20", declared the sixth man. He pointed to the tenth man, "but he got $10!" "Yeah, that's right", exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!" "That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!" The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
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Green Pea Corner
As a part of our regular newsletter updates we provide general information to the newer debt buyers (the Green Peas). This month we take a brief look at the composition of consumer debt and review the major sources of charged-off credit card accounts.
Credit Card Debt Small Portion of Collection Industry
Consumer Credit Outstanding has been tracked by the Federal Reserve in two categories, Revolving and Non-revolving and credit cards are part of the Revolving category. Auto loans, Student Loans, Mobile home loans and all other non credit card loans except for home mortgages are including in the Non-revolving loan category. Overall, consumer credit has decreased at an annual rate of 5 ½% in February 2010 with Revolving credit decreasing at an annual rate of 13% and Non-revolving credit decreasing at 1 ½%. The following chart shows the distribution of new collection accounts in 2007 as reported by the ACA (American Collection Association). Real estate and commercial loans are tracked separately by the Federal Reserve.
Source of Inventory - The Largest Issuers
The top 10 issuers combined, represent over three quarters of the entire inventory of credit card accounts. These are the major US banks and are led by Chase, Bank of America and then Citibank. The total outstanding credit card debt now stands at $858.1 billion as of February 2010, down from the peak of $958.1 billion in the fourth quarter of 2008. The following chart was developed from data obtained in June of 2009 and reflects the total outstanding balances by the top 15 issuers. The "Other" category is the remaining banks, department stores and other revolving charge issuers.
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Business Funding Sources
Self Directed Retirement Accounts (Published in Volume III)
15 years ago BeneTrends was the first company to introduce the 401(k) self-reliant business funding program. With this IRS approved plan in place, you will have the ability to use your own retirement account start a business or grow your existing business with out incurring taxes, penalties or loan payments. (We have confirmed that your debt buying business is eligible) Contact BeneTrends.
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The Loan Buyers Group was formed to allow smaller Debt Buyers and Collection Agencies to work together to purchase National files of charged-off debt. The group also partners with larger Debt Buyers for larger portfolio acquisitions. For information on how what we do and how to join, visit our new Website at www.loanbuyersgroup.com. Join us on Linked-In .com/Search Groups/"Loan Buyers Group: National Debt Buyers".
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