A New Market for Charged-Off Debt

  The resale of bad debt, once considered an incidental byproduct of debt sales, is now becoming a basic strategy for most buyers of charged-off credit card debt.
  As the resale market matures, less-than-reputable firms are squeezed out, making the business more palatable for legitimate debt buyers and brokers-some that previously eschewed any involvement in resales.
  In the past, some firms would skirt the truth about the history of charged-off debt, perhaps misrepresenting them as loans worked by one collections agency when actually several agencies had a turn. That practice would pump up the pricing and make it tougher for buyers to profit from resale of that debt. But with maturity comes business acumen and today's distressed credit card-debt players as a whole are more careful and cognizant of when the numbers don't add up.
  Midland Credit Management, a San Diego-based debt buyer, began reselling distressed debt about 15 months ago, says Carl Gregory, company president. It's now about 10% of Midland's business. Gregory believes the entry of more large, established buyers such as Midland has helped "the industry become more professional since we're a known, reliable, credible source that customers know they can count on."
  It's difficult to pinpoint when the practice of resales began. One milestone occurred eight years ago when, in a speech to the National Association of Retail Collection Attorneys, Walt Collins-chairman and chief executive of Austin, Texas-based buyer Collins Financial Services-told the assembled crowd of collections professionals that their business was about to radically change.
  As issuers began relying more on selling debt to buyers, Collins realized they would be placing less debt with collection attorneys. He told the attorneys that they would have to start purchasing debt, rather than waiting for accounts to be placed with them. Since the collection attorneys are generally smaller operations, most wouldn't be able to buy large packages directly from issuers, but would have to purchase debt resold by larger buyers.
  Some firms, notably Collins Financial and Charge-Off Clearinghouse, began acquiring charged-off credit card debt to resell in a retail market-typically broken down by state or region.
  The growth of the secondary, or resale, market mimicked the growth pattern of the primary market, albeit more slowly. In 1991, sales of charged-off debt, mostly credit card debt, hit $3 billion. By 2002, the market was estimated to be about $75 billion to $80 billion.
  More banks are making selling charged-off debt a normal part of their collections process, and the market is expanding beyond credit card debt to all types of commercial and consumer debt.
  Robert Morris, president of Oliphant Financial, estimates that of about $80 billion in bad-debt sales in 2002, about half of that debt will eventually be resold.
  And the involvement of larger firms is vital for smaller agencies. According to Deb Everly of Warren, Mich.-based Asset Acceptance LLC, "smaller companies need help with the valuation and documentation, and they don't have the same opportunities to buy debt."
  The larger firms have the financial resources to buy large packages of debt from issuers and the clout to negotiate prices for debt that will allow a profit margin for the collector.
  Gary Wood, president of Collins Financial, says his firm provides extensive post-sales support, such as providing the necessary media files and documentation for collections.
  A buyer of debt negotiates with the issuer at the time of the sale for a certain amount of support and documentation for the paper that is being bought. When the debt is resold, the only documentation that can be provided is whatever was outlined in the original sale at the time of charge off. So the larger firms that are directly purchasing debt from the issuers are essentially acting as a kind of outsource service for the eventual buyer, Collins says.
  Another aspect of the debt resale market is the disposal of debt that has already gone through at least one or more collections effort. Since the debt has already been worked, the price goes down. "Regardless of where the debt comes from, there can be a profit ... everything has a price," says Everly, whose firm is an occasional buyer of resold debt.
  Misrepresentations
  But the industry's past ne'er-do-wells remain something to watch. In the past, problems with account representations have led some major market players to shy away from resales-including debt broker National Loan Exchange Corp.
  "You had people misrepresenting their product. That wasn't the kind of brokerage we wanted to become involved in," says David Ludwig, president of St. Louis-based NLEX.
  Now, however, NLEX is in the resale game. "Up until two or three years ago, 100% of our business was brokering paper from originators," Ludwig says.
  In 2002, he estimates that about 20% of his company's business included brokering resold debt. And within the past two or three years, some established buyers began looking at remarketing the remaining balance of accounts that had already gone through their collection process.
  Denver-based buyer Collect America, for example, beefed up its resale program about three years ago. "With increases in the volumes we're buying, the outflow has increased to make us a more significant seller," says Kristin Dougherty, sales vice president. "The volumes we're selling now rival banks."
  The addition of well-known reputable firms to resales is adding significantly to the quality of transactions, adds Ludwig, who sees the number of retail debt buyers "increasing almost daily ... doubling in a year and doubling every year for three or four years."
  Collins believes the "strength of the debt market is the strong niche players ... the mom-and-pop, one- or two-person shops" that do a good job of collecting debt. In the early years of charged-off credit card debt sales, prices were dictated by a small number of big firms. Then as more players arrived, the prices settled down.
  Location
  A similar cycle is playing out in the resales market. Prices of secondary debt used to be about a quarter of the price the debt was when acquired at chargeoff, assuming the account had gone through a collection process. But now, when a price for resold debt is established, the market considers the different variables of the debt-with location often taking primary importance. Texas, Florida, and the Carolinas, for example, are considered soft collection states, while New Jersey and parts of the Midwest are excellent collection states-meaning higher prices in the resale market.
  As the secondary market matures, the beneficiaries are many throughout the bad-debt food chain. Buyers are more comfortable now than they were five years ago that resale offerings are not being misrepresented, although it always pays to be sure.
  Resellers are adding a revenue source to their income stream. And the strength of the players in the distressed credit card debt market gives debt issuers a variety of options.
  There's little doubt reselling is following the footsteps of the primary debt-sales market to legitimacy-if it's not already there. There's even less doubt that resales will grow into a vital aspect of the debt-sales business.