Recovery Options for Older Accounts

  Old charged-off credit card accounts have lower recovery rates than fresher ones. Here, a specialist in aged chargeoffs offers ideas on how to put some youthful vigor into the bottom line of older bad debt.
  The current economic environment presents multiple challenges for recovery managers, including those trying to collect credit card debt. Slow job and income growth coupled with the U.S. population's insatiable demand for consumer debt has fueled record levels of loan delinquencies, chargeoffs and foreclosures.
  Recovery managers have seen their portfolios continue to grow at the same time recovery, or liquidation, rates have declined due to higher unemployment rates. Expanding portfolios force recovery operations with limited resources to process ever-increasing volumes of accounts.
  In this environment, the natural inclination is to focus on newly minted chargeoffs. Recovery rates from fresher accounts tend to be higher and collectors prefer to work newly defaulted accounts rather than those customers who have already been contacted. This natural tendency creates an obvious problem: What should be done with the older accounts?
  Older accounts can be defined in multiple ways. We will define them to mean any account that is more than two years past chargeoff or has been outsourced to a minimum of two outside collection agencies. Every month the expanding volumes of older debt combined with lower liquidation rates on fresher accounts because of the soft economy compounds the need to manage older accounts in productive and cost-effective ways.
  Effective recovery managers know that older accounts cannot be ignored. Recovery from such accounts is critical to effective recovery and loss mitigation. Despite the significance of older accounts, the fact that liquidation rates from these accounts are low relative to collection expense mandates different and innovative recovery strategies.
  Recovery rates for older accounts vary significantly for different issuers due to credit underwriting guidelines and collection practices. Some issuers report generating as much as 6% to 8% total remaining gross recovery from older accounts. Other issuers, particularly subprime ones, may generate 2% to 3% total remaining recovery from their older accounts.
  As specialists in the acquisition and collection of large portfolios of older accounts, we have developed multiple approaches to collecting older accounts. These techniques, which can be used on any type of portfolio, are especially relevant for older accounts and create higher recovery relative to the collection expense:
  * Prioritized collection through credit and behavioral scoring. Credit scoring employs statistical methodology to develop models for the purpose of identifying those accounts with greater expected recovery. Most models relate account demographic characteristics such as state, ZIP code, account age, balance and credit-bureau attributes to the probability that a particular account will be collected during some prespecified time period. Some models also incorporate behavioral attributes such as payment frequency, customer responsiveness and other aspects of customer behavior.
  Once developed and validated, such models allow for the prioritization of accounts. Collection resources are focused on those accounts that have the most likelihood of paying. Accounts that have a lower likelihood of paying do not receive the same emphasis. As a result, larger portfolios of older accounts can be collected more productively.
  Accounts also can be prioritized for collection activities through utilization of one of several credit bureau-based products that provide alerts in the event of certain pre-determined events. For example, large portfolios of accounts can be listed with certain services and in the event that a new phone number is reported to the credit bureau, or if there is an inquiry for a new loan or mortgage, the account information and new phone number are immediately sent to the creditor.
  There is typically a cost associated with listing the account and a cost associated with a hit. As a result, it is important to define the types of accounts that will be listed and exclude accounts where historical recovery rates do not justify the incremental costs. Used correctly, these alert services enable the creditor to focus on those accounts where a new event or evidence of improvement in the customer's life may increase the likelihood of successful recovery.
  * Skip tracing. Many older accounts remain uncollected primarily because of the absence of borrower contact information. Older accounts with good contact data have received multiple collection requests, including discounted settlement offers, and customers inclined to resolve their account usually have already done so. Customers with older accounts who have yet to be contacted represent a fertile source of recovery and typically produce a disproportionate percentage of overall liquidation from the total population of older accounts.
  Most agencies and institutions involved in collections on older accounts utilize various forms of skip tracing. These range from automated processing by one or more third-party venders to obtain more recent address or phone numbers to manual processes involving credit-bureau reviews and Internet searches.
  We have found a mix of manual and automated procedures to be effective. Accounts without good contact information are processed by a number of vendors to obtain new addresses and telephone numbers. We use multiple vendors in sequence determined by cost and effectiveness. New addresses and phone numbers are returned by vendors in an electronic format and are immediately loaded for mail and dialer collection campaigns.
  Individual accounts for which no new contact information can be found are assigned to collectors for manual collection and skip tracing. Collectors typically will review a new credit report, call trade references and current and previous employers. In addition, Cavalry collectors use three or four interactive, Internet-based skip processes to search for alternative phone numbers and addresses. When available, the original loan package containing a credit application and references also can provide leads that may result in a new phone number or address.
  In general, recovery managers should evaluate the overall effectiveness of their current skip-tracing processes to see whether they're bearing fruit. Changing or varying procedures or applying further diligence to tracking down account information could pay off big in terms of recovery.
  The collection tools described above can be extremely useful in generating superior recovery from older accounts. Such tools require time and investment to implement. In the absence of such specialized procedures, many card issuers and other creditors opt to create recovery from older accounts through sales to third parties.
  Debt sales now create hundreds of millions of dollars annually for many of the most sophisticated financial institutions and utilities in the United States. Most major institutions have sold or are considering the sale of their older accounts at some point in the recovery process. National Loan Exchange Corp. (NLEX), debt brokers based in St. Louis, reports that it has seen a 24% increase in the volume of aged credit card and other consumer-loan portfolios placed on the market over the last 12 months.
  For your company, considerations of when to sell will depend upon the individual characteristics of the older portfolio and an assessment of whether the benefits realized from a sale will exceed the cost and time spent collecting the debt. The many institutions that currently sell older accounts are motivated by the following reasons:
  * Sellers receive immediate cash for uncollectible accounts. Cash produced from debt sales is immediately available in a predictable amount rather than received in unpredictable amounts over a longer, unpredictable time frame. Regular sales-for example, selling all receivables after two collection-agency placements-can create predictable recoveries and more accurate budgets.
  * Sellers reduce collection expense through portfolio sales. Collection-agency fees are eliminated or reduced once accounts are sold. Also, administrative expense, including data processing related to the collection and management of uncollectible accounts, can be reduced and reallocated to other, more productive activities. Customer service and credit-bureau reporting issues are directed to the new owner of the accounts and costs in these areas are sharply reduced.
  * Competitive pricing. There are a number of large, well-capitalized and financially stable buyers of non-performing accounts. The depth and competitive nature of the market helps assure sellers that they will receive fair consideration for portfolio sales. According to NLEX, prices for aged credit card portfolios have increased about 14% in the last 12 months.
  * The market has easily absorbed recent offerings of older portfolios. Almost every competitive offering of older accounts within the last year has resulted in a sale with multiple bidders.
  The benefits of selling older accounts can be negated if a seller fails to take normal precautions:
  * Know your buyer. Insist upon a thorough due diligence of the buyer. Look for financial stability and significant experience.
  * Purchase-and-sale agreements. Every agreement should contain a mutual indemnification to protect the seller in the event of post-sale problems.
  * Resale. Most sellers insist on keeping some control over a buyer's ability to resell accounts. At a minimum, the seller should ask for the right of consent regarding future re-sales.
  In this economy, fresh debt can age very quickly. Whether you strengthen your collection tools or opt for a sale, working older accounts should be part of a comprehensive recovery strategy.
  Alfred J. Brothers is executive vice president for acquisitions at Hawthorne, N.Y.-based Cavalry Portfolio Services, a division of Cavalry Investments LLC, one of the country's largest debt buyers. With an $8 billion portfolio of receivables, Cavalry acquires and then collects on distressed consumer-debt portfolios from banks, credit card and finance companies. The firm has operations centers in Phoenix, Tulsa, Okla., and Minneapolis. He can be reached at abrothers Cavps.com.