The
non-performing and distressed consumer receivable market is a fragmented
and growing industry, which is driven by increasing levels of consumer
debt. Despite generally good economic conditions during the mid to late
1990’s, credit card and other consumer receivable charge-offs
have increased as overall consumer debt has increased. According to
the Federal Reserve, American consumers owed an aggregate of $2152.1 billion
of debt as of June 2005, and that the size of the revolving credit market
in the United States was in excess of $806 billion as of June 2005, up
from $758.3 billion in December 2003. Consumer credit is expected to continue
rising over the foreseeable future.
Consumer
charged off debt can be classified into consumer retail installment
contracts, debt shortfalls (deficiencies), private label credit cards
and cards issued by Visa, Master card and Discover. Among the new types
of charge-offs within the consumer finance segment are medical and healthcare
receivables, personal loans, retail sales agreements, in home sales
contracts, student loans, insurance premium deficiencies and aviation,
boat and recreational vehicle paper.
The
credit card charge-offs stood at 4.22% as of June 2005,
resulting in $34 billion in charge-offs. According to the S&P U.S.
Credit Card Quality Index, the loss rates peaked in March 2002 at
7.6%, and stood at 6.1% as of July 2005. Yet, Credit card issuers
have continued to make profits. The gains in yield and the lower cost
of funds helped excess spread levels. The average excess spread stood
at 7.2% and delinquency rate stood at 4.0%. Historically, originating
institutions have sought to limit losses by performing recovery efforts
in-house, outsourcing recovery efforts to third-party collection agencies
and selling their charged-off receivables for immediate cash. From
the originating institution’s perspective, selling receivables
prior to or after charge-off yields immediate cash proceeds (excluding
any tax benefits from the write down) and represents a substantial
reduction in the time period typically required for traditional collection
and recovery efforts. Both non-performing and distressed receivables
are sold at substantial discounts to the balance owed on the receivables,
with the purchase price varying depending on the amount that both
the purchaser and seller anticipate recovering and the costs associated
with recovering these receivables.
The
market for buying non-performing and distressed consumer debt portfolios
has expanded due to a steadily increasing volume of delinquent and
charged-off consumer debt coupled with a shift by originators or credit
grantors toward selling their portfolios of non-conforming and distressed
consumer loans.
The
receivable management industry places receivables into categories
depending on the number of collection agencies that have previously
attempted to collect on the receivables. Fresh charge-offs are typically
past due 120-270 days and charged off by the credit originator that
are being sold prior to any post charge-off collection activity or
are placed with third party for the first time. Fresh charge-offs
are normally sold at $0.045 to $0.065. Primary accounts are typically
180 to 270 days post charge-off and have been previously placed with
one contingent fee services and receive lower price ranging from $0.025
to $0.04. Secondary and tertiary accounts are typically more than
360 days post charge-off and have been placed with two or three contingent
fee services. Secondary charge-offs are typically sold in the range
of $0.015 to $0.025, and tertiary charge-offs are sold in the range
of 50bps to 1cent.
