News & Views 3: Sep 09

There are many hazards in buying debt. Since even a single bad portfolio can hurt your business, knowing what questions to ask is vital in avoiding getting stuck with a dud.

You should understand going into a purchase, that brokers and resellers have one goal, and that is to sell their product for the best price. Scalpers prey on novice buyers, and even the best of the seller's may not willingly volunteer information that they know will reduce the value of their product. This is the 'Buyer Beware" industry, if ever there was one.

A quick scan will weed out the junk, but after that, thoroughly scrutinizing your portfolio is essential in securing one that will reap rewards. Here is a list of questions that you probably want answered before you buy your next portfolio.

1. Has the portfolio been worked before by other agencies? If so how many and who worked the files? The value declines with number of times the package has been worked. What settlement authority did the previous agencies have to settle the accounts? Different agencies have different reputations for effectiveness, but since you may not always know who the package was placed with before you, you have to assume the previous owners worked the accounts hard.

2. Who was the original Issuer? There are clues to the credit worthiness of the accounts by knowing which bank issued the accounts and their underwriting reputation as well as under what card type was issued (Platinum, Gold, etc.) if credit card accounts. How did the issuer collect their own accounts - Did they outsource the collections or did they collect in-house before charge-off. There is a big difference between the two types of collection efforts.

3. How many times has the portfolio been sold? It is safer to make sure that the portfolio has been sold only once. Some agencies are very good at squeezing most of the juice out of a portfolio before they sell. If you follow these agencies, your ability to collect will be greatly impacted. So, know the sellers and their reputations before you buy their leftovers.

4. How old is the debt? Older debt is cheaper because there will generally be a higher number of unrecoverable accounts and many skips. Newer debt costs more but it is most often the most cost effective product.

5. Where did the debt originate? Knowing about the State that the account is from is important for compliance issues relating to local laws and statutes, and for knowing the collectability relative to small claims court, the rules for representing yourself in court, the states procedures for collecting judgments, wage garnishment and so forth. Some buyers like to collect their own accounts and begin by starting to collect in their own state, first. There are also States that you currently may want to avoid. (Florida, North Carolina, South Carolina, Texas currently have a bad reputation by some debt buyers, which may have an influence on the resale value of the accounts) Similarly, the community within in the state where the customer resides may offer insight as to the potential viability of accounts based on local foreclosure rates, unemployment rates, major employers, work ethic, etc. Also, some states have very proactive consumer protection lobby groups, which may be a bigger issue if you are using "legal" to collect.

6. Has the seller adversely manipulated the portfolio? It is common practice for a file to be scored and skimmed. Watch out for portfolios that are not diverse - ie. all elderly debtors (*), all low income, all apartment numbers or PO boxes, all high balance, high number of first payment default accounts, etc. (*) From what we can determine, there is no way to determine age from Social Security Numbers. Verify that bankrupt and deceased accounts been removed prior to purchase. Ask specifically if the package has been scored. There is no way to tell for certain, but if you end up with a portfolio which contains all 85 year olds or all college students or no homeowners you have purchased a file that has been adversely scored. Make sure the answer to the scoring question is in writing and part of the seller survey. See number 9 below.

7. What kind of debt are you buying? Is all the debt in the portfolio the same kind? Have you worked this kind of debt before? If you are considering other assets beyond credit cards or loans that you have worked before make sure you learn what other considerations are important in the purchase of that type of paper, like proper documentation. Remember, the more expensive the paper - the more extensive the documentation. Also, know what kind of collections are succeeding and where the average balance sweet spots are. (We are hearing of success in lower balance accounts in the current market with credit cards, paydays and other types of loans). Is this secured or unsecured debt? If secured, what is the collateral and what is the cash flow; if unsecured, what is the cash flow, what percentage of the accounts are delinquent?

8. Is the seller reliable and trustworthy? Buyers must understand that sellers can adversely manipulate portfolios and sell you just bad accounts. That is why it is crucial that you know and trust your seller. All business relationships revolve around trust and it is important that you develop a good rapport with a seller(s) and work towards building a solid and honest relationship. Look for debt sellers who are members of reputable trade organizations, like ACA International and DBA International. Check all references that you can find and get referrals from people that you trust. Talk to other people who have worked with the seller before. Buyers must understand the origination process, the servicing process and the collection process of the originator. The buyer must also be aware of how the originator packages the portfolios that are being sold. Is the originator sophisticated by scoring the entire portfolio and keeping the high scoring paper for further collection? Is the portfolio stratified where the higher scoring portion is sold for a higher price? Most originators are very sophisticated, and it may by difficult to determine how a portfolio was assembled for sale to a debt buyer. Avoid sellers that appear to have a short term outlook in pushing hard to sell you a particular package. If they know you are interested in a long term relationship they may be more inclined to spend some additional time with you and help you obtain a portfolio that is customized for you situation.

9. Is there a Seller Survey? Ask for the Seller Survey. Not every seller will offer this information. What media is available? What is the cost of the media? What is the put-back criteria - Fraud, Death and Bankrupt? When you buy a portfolio add a clause in the purchase agreement where the seller will represent and warrant the accuracy of the seller survey or you can return the file for a full refund. Bottom Line: Never buy a portfolio without a complete seller survey. Without having the history of the accounts in writing, you do not know what you are buying and when you try to sell the accounts, they may have little or no value at all. So, no matter how the file is represented by the seller or how cheap the price appears, without the seller survey represented and warranted by the seller, written in your purchase contract, you should probably pass on the deal.

10. What is Projected Return on Investment (ROI)? You have to know what your projected ROI is before you ever buy a file. How is the file going to be worked, who is going to work it, what is the projected cash flow and when, how are you going to monitor the collections, what type of reports are you going to get, do you have direct call in access to your collector, what steps will you take if you are not reaching your targets, what is your recovery timeframe, when will you pull the file and give to another agency, when will you sell the file, what is your legal strategy? Be careful about assuming you will sue on your accounts, it's expensive and then you still have to collect on the judgment. Management is the key to successful debt buying and collections.

11. Set a budget for your purchases: How much do you plan to spend? When you go to buy a portfolio, look at an approach where you scale in or buy in increments. Invest a smaller amount now and buy more in 30 to 45 days or so.

12. Have you diversified your portfolio? Balance your risk just like you would in your retirement account. Buy various kinds of products at different times for various prices. If you've got all your money invested in one portfolio and it turns out to be a loser, you may find it difficult to recoup your lose.

13. Are you paying a fair price? Your comparative analysis should help in determining what the portfolio is worth. Don't over pay; it is better to miss the opportunity than put in the effort for minimal or no return. Avoid junk. Compare the price to other recent portfolio sales. Talk to your collector about current pricing and recovery rates for the kind of portfolio you are buying. Keep track of wholesale price information. Talk to other debt buyers and find out what their recent price experience is. If you know what the price of product that you are buying is selling for, direct from the issuer to the big debt buyers, you will get a better idea of current retail pricing. Remember, who you are buying from and where the debt came from has a strong influence on the resale value of your purchased accounts.

14. Be properly set up in your business: Sellers want to deal with people who are professionals. The seller does not want to baby-sit a buyer through the process of buying a portfolio. They are in business to sell product, not to educate you in the business. Be set up in your business by having your LLC or Corporation ready, a business address (Not your home address) and business phone number that will take messages on any calls you may receive from customers - so you don't say the wrong thing and be in violation of the FDCPA, have the right insurances - business and E&O, join the Debt Buyers Association and ACA.

15. Other considerations: Were there Guarantors on the accounts, what is the collection history, payment history, what percentage of the file is first payment defaults, what type of documentation is available (credit applications, statements, payment history) Credit Bureau Report, home ownership, employment, age and health, co-signers, cell phone numbers, geographic location, charge off date, first payment defaults, do you have the debtor signature on any paperwork, are there any file notes where the debtor has mentioned bankruptcy, what types of settlement offer have been made previously, what efforts has the original lender made to resolve the debt, has the debtor sued previous collectors, are there any language barriers, why was the account charged off (loss of job, health, divorce, other one time event, etc.) What are the various put back criteria specified in the contract? (Bankrupt in "x" days, fraud, deceased), how are the put backs processed and by who. Has the seller classified skip and non-skip accounts in the seller survey. When was the data last updated? Generally the less "fresh" a portfolio, a higher the percentage of skips will be found in the accounts. More skips equals a lower price for the portfolio. Few sellers update the classifications prior to sale, leaving portfolio buyers to guess on the skip content. This one fact, weather a skip or not, is a better predictor of the future performance of the portfolio than any amount of scoring could ever provide. Don't buy outdated information.

What does the chain of title show and what are the dates. How do the dates in the chain of title compare to the seller survey. Never buy a package without a mutual indemnification clause. Carefully review the Representations and Warrantees. Pay attention to unenforceable accounts and how disputes will be handled. Are you registered as a debt buyer in the state where you are purchasing the file (Some states require registration).

Clearly understand why you want to buy the debt. Do you have the right collectors for the portfolio you are interested in, is the debt located in a state where you are licensed, does the portfolio have the right average balances, are you paying the right price, are there more files just like this one available if you hit a home run?

16. Recovery Analysis Conclusion: Are you going to litigate the Accounts or obtain Judgments? (Lower Balance Accounts may not be worth the effort or expense) What type of documentation do you have for litigation (Contracts, Payment History, and Applications) what type of collateral does the debtor have? (Home ownership) Is the debtor really unemployed - can you verify? What types of internal collections were performed by the original issuer or subsequent account owners or agencies and who worked the accounts before and what is there reputation? How many agencies? What can you sell the file for and when will you sell? How much would you lend based on the documentation available?

Set up a spreadsheet and compile your own checklist, Define a way to rank each item as not all are weighted the same. Hold to your bid discipline and keep your emotions in check. In this business your success or failure is determined by how well you buy, how well you collect, how well you sell and in how well you manage your accounts. Buying is only one part of the picture. Without paying an equal amount of attention to the other components of the business, you will probably fall far short of your expectations and you may even lose money on the file.

17. Documentation: So now you have made a decision to buy a file, now what? Review the Purchase and Sale Agreement. You may want to get your attorney involved to look this over. What are the Representations and Warranties of the Seller? Add the seller survey to the contract. What are the put back requirements and what qualifies for a put-back? How are the put-backs processed and in what time frame? What proof do you need to supply the Seller for a put-back? How are payments handled that the seller receives from the accounts after you gain title. What is the status of any claims or lawsuits on any of the accounts? Did the seller score the accounts prior to sale? What are the obligations of the Buyer of the accounts? What rights does the Seller have in repurchasing accounts? Are there any restrictions on resale of the accounts? Does the indemnification cover both the Buyer and Seller fairly? What phone number and address are you using when buying the files? Is this the same information that you are providing the collection agency? Does the Asset Schedule attached to the contract match the data file (Account balances and number of files). What media is included in the sale? When will you get the media and how much does it cost if not included. Is the Bill of Sale signed properly by all parties? Do you have a copy of the wire instructions and a receipt of your wire transaction? Review the Chain of Title. How many previous owners are there? What are the dates of the transactions? Does this information match the seller survey?

News & Views 3: Sep 09

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