The debt buying industry has found itself in the spotlight in recent years leading to numerous changes and a fair share of uncertainty. This climate has let only agencies with the most steadfast of temperaments and industry-tested of business strategy remain successful.
When asked for the recent industry-changing occurrences, Matthew Maloney, president and chief investment officer of the FFAM360 Group of Companies and First Financial Asset Management, saw multiple.
“With respect to ‘one of the biggest recent occurrences in debt buying,’ there seems to be several events or trends that could qualify for this: regulatory trends, technology trends, legal trends, capital-market trends, economy, etc,” said Maloney. “But from my perspective, the unexpected ‘exit’ of various debt buyers (some notable, others not as much) seems to be having significant ‘influence’ on the current state-of-affairs in today’s debt buying market as we head into the end of 2018/beginning of 2019. While various factors have played a role in why so many debt buyers have ceased to exist in the last 24 months (e.g. (1) foreclosed on by their lenders, (2) shut down by regulators, or (3) simply sold-off their business/assets to pursue other interests outside of debt buying, the common thread amongst each situation is that the debt buyer(s) were running their businesses at unsustainable (unprofitable) levels, an intrinsic consequence of portfolio acquisition pricing far exceeding the appropriate quantitative value(s), which ultimately led to financial stress and caused those debt buyers to “exit” the market.
“It’s affected the landscape in various ways, most of which seems to express a favorable influence. For example, deal-flow in certain segments of the marketplace has Matthew Maloney increased, and pricing in those same segments has adjusted into risk-appropriate valuation ranges that are more sustainable for the debt-buyer(s) risk-adjusted returns for these types of accounts receivable assets. In one specific instance, I had a creditor contact me to work thru what they called a “long-range economic partnership” that both parties could rely on (versus their prior objectives of chasing a single buyer with the highest bid). I have seen this in both the performing and non-performing (charged off) segments of the auto-loan, healthcare, consumer loan, and card sectors. Ultimately, a balanced and fair valuation for these types of assets, with contractual terms that are well balanced will allow for the marketplace to have a sustainable life cycle for the future.”
Mark Naiman, president of Absolute Resolutions Corporation (ARC), also noted fewer participants in the market citing the CFPB and new regulations for originating creditors.
“After the rise of the CFPB (now BCFP), many of the smaller players dependent on resale had to shift their models almost overnight,” said Naiman. “The ones that could, either changed to a contingencybased model, or sought out similar players and through M&As, many smaller companies chose to merge with peers forming a larger more substantial market presence. Admittedly, the newer regulations and scrutiny facing originating creditors was a tremendous burden on companies of any size, especially since the compliance requirements were reciprocal.”
To adjust to these changes in the debt buying landscape, some professionals have taken to using internally developed tools to improve their data analytics, enhance performance and improve the consumer experience. This is the strategy that has worked for The Bureaus, Inc. according to its vice president, Marian Sangalang. Sangalang also stated she has seen changes in what issuers are looking for in a legitimate debt buyer.
“We are seeing some issuers taking a different approach to vendor oversight and are showing more interest in association certifications to work in conjunction with their existing review program,” said Sangalang.
Regarding how that affects the debt buying landscape today, Sangalang said, “The level of oversight the issuers of credit are required to perform is understood by our industry, the opportunity to provide credible association certification in conjunction with the issuers requirements will provide a more seamless and streamlined review process for the debt buyer and the issuer.”
Naiman noted the changing landscape as well and emphasized the importance of adaptability by making sure the accounts being worked align with the environment at large.
“ARC’s philosophy has changed in parallel with the environment, yet our strategy has remained focused on finding portfolios that make sense within the ever-changing regulatory whirlwind,” said Naiman. “Being dynamic, while simultaneously looking at asset classes that fall outside of standard credit card and installment loan markets allows us to maintain a fluid and adaptable presence in a market that is overwhelming dominated by large players. Maintaining a medium presence in the industry allows us to be both more patient and adaptable in times of economic uncertainty.”
Fortunately, the debt purchasing landscape may be on the verge of more stability as regulation may soon find additional footing. Sangalang hopes upcoming developments will bring issuers back to the table.
“We believe that there will finally be some clarity provided for our industry with the Notice of Proposed Rulemaking expected in March 2019,” said Sangalang, referring to the CFPB’s recent announcement in the Spring 2018 rulemaking agenda. “Many issuers have been hesitant to come back to the market until such clarity was provided. We are hopeful that this will provide the level of clarification needed for those issuers to once again enter into the debt sales market providing additional markets for all debt buyers.”
History and its tendency to repeat itself may provide some insight into the future of debt buying as well. Naiman sees indicators in the economy that suggest a continued increase in the number of accounts in default.
“The abundance of product is a direct correlation to the amount of household debt, and synonymously the amount in default,” said Naiman. “We head into 2019 with more debt default than prior to the last recession, and a wage gap and unemployment rate that are once again ‘almost touching.’ If the past is any indication of the future, we know that the economy is perched on the edge of a knife, and 2019 should be a very interesting year.”