If a downturn hits and delinquencies and charge-offs rise as expected, lenders will have to take a hard look at their past-due accounts and consider their loss mitigation options carefully.
One obvious, easy way to liquidate your charged-off portfolio is to sell it to a debt buyer. The benefits are clear. There is no ramp-up needed if you experience a major increase in charged-off accounts, and a buyer can take a bulk of inventory at once. Debt sales can be completed with minimal support and with reasonable resources, and result in total liquidation for the lender.
But be careful. There are potential drawbacks to selling your debt. There can be risk to your brand and to your consumers. Poorly planned debt sales can result in compliance and regulatory risk, too. While it may seem simple, there are pros and cons to selling that lenders must consider. Here are four key questions lenders should ask themselves (and answer) before selling debt.
1. Do you have a good debt sale partner?
Compliance is key in collections, and partnering with a purchaser who doesn’t follow the rules is a recipe for disaster. Selling debt creates one of the longest relationships of all the recovery streams. Lenders should look for partners who have an impeccable record of compliance and a well-rounded leadership team. Just as lenders should look for partners who are an extension of their brand, they should look for debt buying partners who can ensure brand protection.
If your consumer base is accustomed to digital communication and self-service, you want to seek a debt sale partner that has the same ability.
2. Is your portfolio in the right condition?
Selling portfolios to purchasers may require minimal resources, but lenders have to ensure that the portfolio will be workable for the purchaser. Specifically, lenders should focus on:
- Clean data;
- Accessible and clearly labeled account documents, like applications, statements, and correspondence;
- Correct balance and account breakdowns
Remember: the relationship between the lender and purchaser doesn’t stop at the time of the sale. Lenders should be prepared to deal with customer disputes and requests for media and affidavits.
3. Is it the right time?
If there is a major increase in charged-off accounts and a lender is employing an agency-only strategy (or combination internal/agency strategy), there will be challenges in ensuring the agency can absorb that increase in placements and still give the accounts proper treatment. Onboarding a new agency can be a year-long (or more) process and adding debt sales to your strategy makes your strategy more flexible.
4. Do you understand the risks?
According to an OCC bulletin published in 2014, “Banks must be cognizant of the significant risks associated with debt-sale arrangements.” The bulletin goes on to list the risks:
- Operational risks. Lenders face increased risks when selling debt to debt buyers, especially if they don’t do their due diligence. Without adequate controls, lenders are at risk of providing inaccurate information to their debt-sale partners.
- Compliance risks. If a lender does not appropriately assess a debt buyer’s collection practices, the lenders could be at risk for not only reputational damage, but legal and regulatory ramifications.
Debt sale is a part of a healthy, well-rounded collections strategy as long as lenders keep their consumers in mind.
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