A debt sale is just one of several recovery strategies for collections & recovery executives to consider, but it has a lot of benefits. Selling a charged-off portfolio creates immediate liquidity and requires minimal support and resources from the sellers’ side. If you have taken a hard look at your past-due accounts, weighed the pros and cons of selling debt, and are ready to start a debt sale program, it’s time to maximize the value of the sale.
Following a few key steps can help to maximize the value of your portfolios in debt sales and can lead to a winning collection strategy. Looking for debt-sale best practices? Here are four ways to maximize the value of your sellable portfolio in any debt sale program.
1. Determine which accounts to sell and when to sell them
A debt-sale program is a good way to diversify your collections & recovery strategy, but it’s only a single piece. Working with your credit risk officers and data team to determine which accounts should be sold, and when, is key to maximizing the value of the portfolio.
For example, identifying accounts within your charged-off population that are working with debt settlement companies allows you to do one of two things:
- Sell those accounts for an increased rate, because of their documents likelihood to pay; or
- Keep those accounts and collect on them internally.
Deciding when to sell charged-off accounts matters, too.
Over the last two years, because of an increase in disposable income, consumers have been able to pay down their past-due debt, so selling accounts didn’t necessarily increase liquidity. But as the macroeconomic environment evolves post-pandemic, selling becomes more attractive, and pin-pointing exactly when to sell can increase the value of your portfolio. For example, accounts may perform well for internal collections for the first three months post-charge off, and collections & recovery executives might consider delaying sale until after the accounts are placed with a third-party agency, too.
2. Consider how your loan terms & conditions could affect the debt-sale
Potential partners for debt sale will closely examine the terms & conditions of your loan or lines of credit for a few key provisions - provisions that will determine what they can and cannot do with the portfolio. Some provisions will affect the price you can expect. Others will rule out some purchasers entirely.
One very good example: the mandatory arbitration clause. If your terms & conditions have a mandatory arbitration clause, you’ve ruled out purchasers who have a litigation strategy.
“[The original creditor] may not have a litigation strategy,” says Bob Deter, VP Business Development at Crown Asset Management, but their prospective debt purchasers might, and mandatory arbitration clauses eliminate purchasers with a legal strategy. Other, non-mandatory arbitration clauses can affect debt sale, too. Some terms & conditions allow for electable arbitration.
While including a mandatory arbitration clause in your terms & conditions isn’t a deal breaker for all debt sales, it will limit your pool of available partners.
Debt purchasers will favor portfolios with terms & conditions that allow for electronic communication with your customers, especially if the loan or line of credit originated online and if the customer primarily used electronic communications when the account was active.
3. Get your media and account data in order
“Media documents are the lifeblood of a good debt sale,” according to Keith Walch, Chief Acquisitions Officer at Spring Oaks Capital.
Debt purchasers will require different documents based on the asset class and their recovery strategy, but at the bare minimum for each account sold, they will need the charge-off statement, a copy of the terms & conditions or customer agreement, and a clear chain of title for the account.
Additionally, since the implementation of Regulation F and the prevalence of state-level consumer protections, sellers will also need to provide purchasers with an itemization of the balance between charge-off and the purchase balance, and a breakdown of the balance of the account.
Purchasers will be more attracted to portfolios that include more documents, like transaction and dispute histories.The more data and media you can provide to a debt purchaser, the higher the value of your portfolio.
“Information like customer bank account information, and IP addresses are useful to purchasers in ruling out fraud,” says Bekah Luebcke, VP of Operations at Crown Asset Management. Other new data elements debt purchasers are looking for include: email consent and email opt-out, last activity date & amount, the charge-off creditor name, and some new identity data points.
Data points like contact preferences and payment histories also increase the value of your portfolio. Having those documents makes the collections process easier for the purchaser, regardless of their strategy, and so will increase the value of your portfolio.
4. Prepare for post-debt sale responsibilities
No, your responsibilities do not end when your debt has been sold.
“Selling a portfolio of debt doesn’t mean a lender sells away their responsibility and accountability of what takes place on consumer accounts post sale,” says Ralph Liberio, President & CEO at NCB Management.
Creating a robust relationship with debt purchasers can increase the value of your future portfolios, and failing to perform necessary tasks, like signing affidavits or providing adequate support for disputes or fraud claims can damage those relationships. Once you’ve sold debt to a purchaser, your brands are tied together. Purchasers will expect that collections & recovery executives are willing to participate in oversight, and especially in an active regulatory environment, it’s critical to maintain relationships with debt purchasers who understand the regulatory requirements and don’t put your brand at risk.
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