With the current political and legal environment largely opposed to buying and selling consumer debt, originators are left with fewer options to maximize the profitability out of their delinquent accounts.
However, another option is becoming more and more attractive – nonperforming commercial account sales. Many originators, while set up to handle consumer accounts, do not have the infrastructure or knowledge to set up sales for their nonperforming small-balance commercial accounts. While secured and real-estate backed loans are a bit easier to move, smaller commercial accounts tend to be pushed to the side because the departments tend to be separate entities and are solely concentrated on recovery, not sales.
However, benefits abound for originators to find a path to sell commercial accounts.
- Fewer regulations. Commercial collections do not suffer from the regulatory oversight that consumer accounts do, and the legal pushback against the gray-area collections methods has been less effective. Though the more effective and long-term collection efforts still follow FDCPA and TCPA guidelines, and fraudulent collection activities should be avoided and discouraged, commercial debt sales are a more open regulatory environment.
- Buyers and collectors need paper to work. With consumer sales on a downward spiral, the market for any fresh paper is wide open.
- Because demand is high, prices are increasing on commercial paper. Even low-grade heavily worked older paper has a higher demand.
- Former funds that were concentrating on consumer paper need several avenues to spend their money, and many are turning to the commercial realm at all levels.
Seeing the above positives, but knowing the collections environment caused by illegal and unethical activity, how should an originator go about selling paper?
- Set standards for buyers. Buyers with a track record of following FDCPA as a guideline are probably the first, best choice. Avoid buyers with regulatory issues and with histories of complaints in the consumer realm. Commercial-only buyers may be the best option here.
- Get organized. Buyers are going to need to see more than spreadsheet data. Copies of documentation, availability of original documentation, and collection activity and legal efforts are necessary information.
- Scrub the debt. Not only for bankrupt and deceased debtors, but a large problem at times has been the inability of originators to go through the proper legal procedures to obtain deficiency judgments in foreclosed real estate.
- Know the market. Consult with brokers, sellers, and buyers as to what prices commercial notes are selling. Be aware that a paradigm shift of value may be necessary – notes with six-figure balances that are unsecured with a guarantor with a low credit score may be near worthless, and the be ready to realize that large balance accounts may be worth very little.
With the consumer market in such upheaval, originators need to realize that maximizing profits may need to come from other avenues. Commercial debt sales are an excellent avenue for originators to shore up their books and increase revenue out of accounts that produce little profit.
Jeffery A. Hartman |Partner
Fitzgerald Advisors, LLC