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Editor’s note: A version of this first appeared on Medium. I was fired from the Consumer Financial Protection Board’s Consumer Advisory Board last week, along with all of its other members. Why? Because the acting head of the bureau, Mick Mulvaney, appears intent on running the consumer protection bureau into the ground while claiming a lack of “global perspective” and wanting a “fresh start.” Never mind that this board has been the most diverse it has ever been — split about evenly between consumer advocates and business people (with some academics thrown in for good measurement). If Mr. Mulvaney was concerned the board was only wild-eyed consumer protection activists, he didn’t appear to notice executives from industry giants Citi, Discover, FICO, Mastercard and PNC. Or if he really cared about private sector innovation, as he claims, he missed the presence of fintech legend Max Levchin, TrueAccord’s Ohad Samet, NerdWallet’s Tim Chen, Oportun’s Raul Vazquez (both of the latter being Core portfolio companies, for disclosure) and myself. This mass firing is the latest in a string of actions meant to kill a regulatory body that was formed in response to the most devastating consumer financial abuse in nearly a century. Mr. Mulvaney, famous for having called the bureau a “sick, sad joke” before taking its helm, was installed as a cynical gesture by a president who knew the bureau was too popular to dismantle. Mr. Mulvaney has all but kicked the life out of the bureau through a series of navel gazing exercises and a moratorium on all (but Wells Fargo’s) enforcement of legal consumer protections. Acting Consumer Financial Protection Bureau Director Mick Mulvaney's decision to fire the bureau's consumer advisory board is just the latest example that underscores his desire to kill an important regulatory body. Bloomberg News “Good riddance,” you say? I’d ask you to think again. Yes, our financial regulatory system is a messy patchwork of state and federal agencies. Yes, the industry is spending way too much on compliance, shuffling way too much paperwork. Yes, I think the CFPB overused its stick relative to its carrots in the past. Instead, we should make a long-term, concerted effort to modernize our regulatory infrastructure (taking inspiration from the United Kingdom and Singapore). But consider the alternative: every rule in place today is a response to incredible harm done to hardworking Americans by greedy, unscrupulous, short-sighted and sometimes outright criminal actors in finance. The CFPB, in several short years, has collected more than $12 billion in penalties for 29 million Americans who were sold misleading products or services. As a profit seeking capitalist who invests in high-growth fintech startups (like Ripple, Mosaic, Oportun and more than 30 others), I believe in guard rails, in rules, in regulation. And I believe the prudential regulators’ primary responsibility of safety and soundness of our financial system does not adequately protect consumers. And I believe financial products are sufficiently complex and materially impactful on people’s lives and livelihoods that having a consumer watchdog is entirely warranted — even if it is a pain the ass, a cost to the system, and a drag on innovation. The stakes are just too damn high, for each household and for our country. So, yeah, I’m sad we were fired for no good reason. It was a genuine honor to serve on the Consumer Advisory Board for more than a year. But that’s completely immaterial to the systemic irresponsibility I believe Mr. Mulvaney is exhibiting to his duty to protect everyday Americans from harm. Further, wildly oscillating regulatory entities cost the industry by introducing even greater uncertainty. And what is perhaps to me the most annoying: Even a conservative, limited-regulation leadership can express itself in smart governance and shifting priorities; it does not need to resort to spreading organizational cancer. Arjan Schütte Arjan Schütte is the founder and a managing partner of Core Innovation Capital, a leading venture capital fund investing in financial services companies that empower everyday Americans.
Over the past 12-18 months, there has been a real increase in interest by lenders around the idea of establishing “all in one pricing” (AiO) with their repossession forwarders.Most of this interest has been spurred by concerns expressed by the CFPB regarding ancillary fees as well as a desire by lenders to simplify the invoicing/payment process. AiO can, indeed, offer benefits in these areas.However, as many lenders have come to understand, it must be approached very carefully and requires fairly deep analytics to gain a clear view of where the pricing should fall.While many lenders have been examining the strategy, at this point, very few have adopted it as they have come to realize they simply don’t have the data points necessary to gain a solid understanding.The remainder of this article will examine the key issues surrounding AiO pricing with the aim of giving you a better understanding of the dynamics that come into play. What Is AiO Pricing? Perhaps the answer is obvious, but we have found that different lenders do have different views.In its purest form, AiO pricing is a single flat fee that covers the cost of the repossession and all ancillary services that might come into play to complete the processes required by the specific case.This may include: ·Key cutting ·Personal property ·Storage ·Redemption ·Use of flatbeds ·Transportation to auction It would be great if the full cost of these services could just be added to the cost of every repossession.However, since all, some or none of these services may come into a play on a given case, simply adding the full fee to each obviously would result in an AiO fee that would be ridiculously high. So, the challenge lies in understanding the utilization factors relating to the various ancillary services possibilities.Unfortunately, the utilization factors can vary tremendously from portfolio to portfolio and, therefore, detailed analytics are required to come up with a fee that makes sense for both your customer and your vendor partner. Let’s take a look at some of these variables and how they can impact the pricing model. Key Cutting As we all know, sometimes a key is obtained when a car is recovered and many times one is not.To determine a key cost factor that can be applied to every repossession, you have to make an assumption about what % of recoveries will require a key.This is data that we are able to track in our proprietary database and I can tell you we see a wide variation, ranging from 2-3% to as much as 10% where keys have been provided. Another very significant factor is the mix of the types of keys required.Again, it can be very portfolio specific.For instance, we have one large captive lender client that was an early leader in the deployment of proximity keys which are very expensive.The average key cost is off the chart.Conversely, we have title lending clients where exactly the opposite is true.The chart below summarizes the impact both can have on the AiO price.
Your institutions’ policy regarding keys can also have a major impact.Some lenders want operational keys available on all cars prior to transport.Others only want keys cut if required to access the vehicle for personal property determination.Several considerations….and we have only covered keys!
Pricing for the costs related to the redemption of the vehicle by the customer is one of the trickiest aspect of AiO pricing.The first hurdle is to understand the average redemption rate on the portfolio.To predict the variable with any confidence/accuracy, one must have at least six (preferably 12) months of history tracking the issue.Not only do redemption rates vary significantly by lender, but they also vary significantly by portfolio within the lender.For instance, a post charge off skip portfolio will have a much lower redemption rate than a 1st placement pre-charge off portfolio.
To put the issue in context, we have one lender whose 1st placement business redeems at a 24% rate and another that redeems at a 42% rate.Assuming that the agent will be limited to a maximum total fee of $150 per actual redemption, the impact on the AiO rate would be:
The other very important component of the redemption related costs is the amount the agents are allowed to charge the lender in redemption situations.Any redemption has a potential combination of personal property, administrative and storage related cost that the agent does expect to invoice.Historically, these costs have varied by region and even by agents operating in the same region.However, for an AiO approach to work, these fees must be standardized across all forwarders/agents.The approach to doing so is all over the board.We will leave that for another article.
Personal Property – No Redemption
In many cases, a car is not redeemed but the customer does want to retrieve personal property.Due to CFPB concerns, most lenders do not want the agent collecting any personal property related fees from the customer.However, it properly account for these fees in the AiO model, one must make assumptions on what percent of recovered vehicles will involve retrieval of personal property.Again, it varies meaningfully by portfolio.
Excess storage fees must also be accounted for in the model. Most repossession come with a certain amount of free storage, but what happens when that is exceeded?The AiO model must anticipate that possibility and assign a cost for it.Again, that can vary significantly by portfolio.We work with one lender that generally moves cars off the lot to transport within 4-5 days and another that averages almost 20 days.
Clearly the AiO pricing model has many moving parts.If you want the right price and you want to feel confident that your vendors will be able to live with that price for a reasonable period of time, you will need to be able to provide very solid data on your portfolio.If you are unable to do so, our recommendation is to have a very transparent process with your vendors in which all assumptions are provided along with the resulting pricing model.With that in place, all parties can monitor the actual performance and agree to make adjustments accordingly.
It is well-known that litigation costs and business failures have been rising. Today, bankruptcies are at an all-time high, but even more startling is the increase in businesses that simply lock their doors and walk away. Adding to the problem are companies that were operating in the black, but now show too much red ink. The results of this is an increase in companies that are paying their bills slower, asking for extended payment plans, paying their preferred or secured vendors first, then picking and choosing who to pay and who not to pay. Statistics show that the average credit ratings of companies are declining and their “will to pay” is keeping pace. Adding to their burden is an aggressive move by the IRS and state authorities through increased audits resulting in (not anticipated) tax due with tax liens placed upon their business. Adding to the credit grantor’s misery is the fact that debtors are more educated today about who to pay, when to pay and who not to pay at all. This trend can be tracked to the source, which is the public media, social, advice from their attorneys or peer-based experiences. Too often we see debtor companies invite and use litigation as a means to an end. Debtor companies know that if litigation action is taken against them, they have a number of options and tactics they can use to their advantage.Debtors and their attorneys know that when suit is filed, they can use various stalling tactics allowed by the court systems. Debtors can buy as much as 18 months or more before they seriously are forced to make a payment decision. Their tactics include the following: ●avoiding service ●disputes that need validated ●continuances ●motions for discovery ●demanding witnesses ●no show at trial resulting in default judgments with no revenue recovery pursuit These tactics, in many cases, are intended to test your litigation policy and resolve allowing you to make errors that they can use to their advantage. Many debtors know, since they are in business themselves that companies set a suit threshold before they will consider filing suit based on what the creditor believes is a balance size that justifies litigation. Not knowing what it is but having knowledge of its existence gives them the advantage of waiting out collection agency phone calls, letters and threats of potential litigation and will wait to see if and when it happens. Depending on the balance, many know for sure that suit will not be forthcoming so the bill remains unpaid. Debtors who have a poor credit rating have the advantage. What more can you do to me? So why should I pay? The problem here, if you are an unsecured creditor, is that they will pay their secured creditors on time and neglect your bill opting many times to simply find and switch to a competitor who will grant them credit or operate C.O.D. when needed. They have no sense of urgency. Nothing intimidates a potential debtor more than complete and thorough credit risk investigation prior to adding them as a customer. It is a physiological fact that impacts their thought process from the beginning. Having a weak policy or one that allows a company with poor predictive pay patterns to order on terms sends a message that advantage can be taken, at will, if needed. Let’s face it - the court system is overworked, crowded and has become more pro-debtor. Cases for debt payment are being pushed out farther into the future by judges due to defendant requests for more time as a means to advance more pressing cases. This tactic is very effective simply because it elevates the plaintiff’s costs, time and interjects uncertainty in decisions by the plaintiff and forces the plaintiff to consider their return on investment. It forces credit granters to ask themselves, what will be the cost to pursue the debt and defend against a counter suit? What are the odds of the plaintiff winning? What are the odds of the defendant winning? What will I gain at the end? Is the cost simply worth the time and return? In some cases the answer is yes, but in other cases, no. This tactic is a very effective method of getting the case pulled at the plaintiff’s request due to the cost involved and time constraints on under staffed departments. Court systems are stopping the practice of allowing phone witness depositions and forcing the plaintiffs to produce a specific witness in person, not allowing your collection agency to represent you or to use anyone available at your company. Defendants and their attorneys subpoena specific people as a “must” attend. If the plaintiff sends a witness, many times the defendant’s attorney will ask for a continuance forcing the witness and company to spend more money to the point that the return on investment will not be worth the effort. Too many times we have seen the litigation process advance, costing the plaintiff substantial time and money only to result in a settlement at the last minute, virtually within the courthouse just prior to hearing the case. Many of these settlements accepted are the same amount or slightly higher than what was offered in months previous during the collection phase of recovery. The advantage for the defendant is that they have successfully bought the time to plan the repayment on their terms. The disadvantage to the plaintiff is that they have spent more money and time through litigation costs and increased attorney contingency fees for obtaining the settlement. When litigation is successful, the advantage to the defendant is that in many cases they can get a court ordered payment plan better than what was offered during the collection phase of the process. An additional advantage is that they will not stick with that plan and the Plaintiff and their attorney must keep spending time and money to pressure the defendant to make the scheduled payments. Debtors know, especially if they have a poor credit rating, that a default judgment is nothing more than a legal document stating they owe the money. Something you and they already know. The advantage for the defendant is that judgment enforcement is costly and many plaintiffs will not pursue the enforcement due to the additional costs. It is reported by many of our clients that their chosen attorney is remiss in pursuing enforcement because their client will not pay more for the enforcement and they will not want to incur cost out of pocket to do so. They simply decide to pursue better case options. In this scenario the defendant gets away without paying. Today more than ever, a change in the status quo of litigation policy and procedures is needed. [ Related:When is Litigation the Answer? ]
It seems like a straightforward enough question. Any receivables manager should be able to answer it with a quick glance at a report or two. Unfortunately, the number at the bottom of the page is a lot like the tip of the iceberg. It’s what you don’t yet see that may end up doing the most damage.You’d be hard pressed to find a company not taking a long hard look at their credit and collection policies, and for obvious reasons. Shorter terms, lower balances, additional and more thorough credit references are just a few areas we’ve all tightened up on the front end. Working accounts sooner, with a more uniform and accelerated escalation process is becoming a new doctrine for collection managers on the back end. So if we’ve tightened up requirements on the front end, and we’ve taken in some slack we previously extended to our slow payers, where should we look now? Even the most diligent credit manager or analyst would be hard pressed to consistently and accurately read the future. Your best customer two years ago could very well be succumbing to the same financial hardships so many others have. And, unlike the one time, hit-and-run customer, your instincts will likely be to extend some leniency their way if they do slide a little. Unfortunately, the slide could be more rapid than anyone expects. So instead of relying on a credit application from ten years ago and a previously solid payment history, why not take an additional step to protect your interests? An annual credit risk assessment of your active customers can provide insight and allow you to make more informed and appropriate decisions based on their current financial health. Some clients run a complete portfolio analysis for all customers annually and even run their “B” and “C” tiers of customers quarterly. On more than one occasion, the trending information they’ve received has allowed them to probe a bit further before green lighting a large order. And in some cases, the order size or terms can now be adjusted to reflect the updated potential risk factors. Accessing the various databases and information needed to come up with useful results would likely be cost prohibitive for most companies to do themselves. However, in some cases, the cost of programs such as these can be zero. More often than not, the results of a credit risk assessment hold at least a surprise or two.
When the bitcoin bubble bursts, there will be quite a few investors in debt. According to Cointelegraph, about 22% of bitcoin investors used borrowed money to purchase bitcoin. People are even taking out mortgages to buy bitcoin, in addition to using credit cards and equity lines. This means there’s a lot of people accumulating a lot of “bad debt.” Bitcoin is still so new and unregulated that these individuals are taking huge risks to invest, hoping to strike it rich. Many people, including the founder of another popular cryptocurrency dogecoin, are predicting the bitcoin bubble to burst… and soon. So when the value of bitcoin tanks, there will be massive amounts of debt left behind. Some are even drawing parallels to the 2008 housing crisis because people took on huge amounts of debt with the expectation that the housing marketing would boom, only for the bubble to burst. People were left with too much debt and not enough assets to cover it.Bad debt is debt that doesn’t increase your net worth, has no future value and that you don’t have money to back for. Some examples of bad debt are auto loans and credit cards. Good debt is considered an investment that generates long-term income or value. While any amount of debt is too much, there is an easy way to find out if your amount of debt is too high. A good metric to use is your debt-to-income ratio. To find this, add up all your monthly debt payments and divide that by your monthly gross income. Anything over a 43% debt-to-income ratio is a red flag to potential lenders. Learn more about bad debt here. Yes! Here are a few words of advice to those interested in investing in bitcoin: To prevent going into bitcoin debt, first we suggest only buying what you can afford. A good rule of thumb is that if you have to borrow, or you can’t buy the same thing twice, you can’t afford it. Bitcoin can be purchased in fractions for a cheaper price. Start small before spending all your hard-earned money. Bitcoin might not even be the smartest cryptocurrency to invest in. There’s a host of other options available, most of which are currently doing well. Research some other (possibly cheaper) options, like ethereum or litecoin. Insured bitcoin can be bought through Coinbase, which is better than uninsured. However, keep in mind that only 2% of Coinbase bitcoin is insured. Always read the fine print! Similar to the stock market mindset, to survive in bitcoin you’ll need to buy low and sell high. We realize this advice is a little too late, considering bitcoin was $500 a few years ago and is now in the tens of thousands, but it’s still good advice to follow nonetheless. This is where the gamble comes in. You never know when the price will fall or shoot back up, so prepare for anything. If you’ve invested in bitcoin or any other cryptocurrency, you need to watch the value like a hawk and sell if you see the market start to tank.
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