debt buying industry overview and profiles – 2004

31Collection Advisor January/February 2004

• Automatic Exporting & Importing of ACH files / Check Imaging

• Collection Scenario Designer / Check Guarantee Module

• Worthless Check Affidavits / Automatically update Web Reports and Check Verification Centers / Consolidated Returns

• Merchant Reimbursement & Sales Commission reports may be sent by Mail, Email or Faxed. Client reimbursement & Sales Commissions are automatically paid via ACH Credit.

• Automatic Call Lists and Letter Generation / Quick Notes Entry

• Single and Multi-User versions from $2,495 to $10,495

(888) 436-5101 Ext 12

Reader Service Card No. 44

Check Chase is not only an all inclusive check recovery program, but a complete turnkey system, designed for your agency to conduct the business of both electronic as well as traditional check recovery. View our on-line Demo at www.checkassist.com.

Collins Financial Services, Inc. 31OSI Portfolio Services 32PRS Assets 33The Sagres Company 34UniFund 35

High 5 Debt Buyers Play to WinBy Richard S. Buse

as importantly, the RTC was bringing closure—in a relatively short period of time—to an immense administrative headache.

If the concept of selling distressed loans was working for the government, could it not also work within the private sector where companies faced a continual supply of distressed consumer debt?

Out of that thinking, private sector sales of debt portfolios began to grow in popularity. Banks and other credit card issuers now view debt portfolio sales as a means for resolving long overdue loans.

Because those accounts have been charged off, the proceeds from those debt sales can have an immediate positive impact on company financial statements. The company also is rid of the costs associated with overseeing recovery efforts.

Banks have used that concept for other bad loans for the same reasons. Automobile loan financing companies have followed suit, as have, for example, retailers, fitness clubs and providers of student loans. The concept is applicable to virtually any company or industry that

issues some form of credit to its customers.On the purchasing side, collection agencies and law firms that

specialize in recovery efforts also have begun to view buying debt portfolios as a financially attractive alternative to working solely on a contingency-fee basis with credit issuers.

The growing popularity of debt portfolio sales doesn’t mean an end for traditional recovery efforts. What debt sales do, however, is give both credit issuers and collectors another tactic to use in improving their financial performances.

The following reviews of debt-buying companies provide insight into the history of this concept, and the ways it has been applied by both credit issuers and those in the collection and recovery industry. The reviews provide examples of the different markets that sell debt portfolios, and illustrate the different tactics or strategies applied by debt-buying organizations.

The reviews also provide some differing perspectives as to how the whole concept of debt-buying will grow and mature. Those perspectives can help all of us understand the impact that debt-buying will have on the recovery industry.

HIGH5

Debt BuyersR

emember the savings and loan scandal that unfolded in the eighties? In exchange for providing the billions of dollars needed to guarantee depositor accounts and to stabilize the industry, the federal government acquired

a myriad of distressed loans from hundreds of financial institutions. It turned all of those loans over to the newly formed Resolution Trust Corporation (RTC), which began bundling those loans into debt portfolios and selling them to investors, rather than trying to recover those debts itself.

In comparison to the balances on those loans, the prices the RTC was accepting for debt portfolios seemed quite low. Critics charged that the RTC was promoting fire sales that were shortchanging the taxpayers.

There were two factors, however, that caught the attention of the financial services industry. First, the RTC was getting money for so many bad loans that had sunk so many financial institutions. Just

Collection Advisor January/February 200430

Reader Service Card No. 13

31Collection Advisor January/February 2004

HIGH5

Debt Buyers

Collins Financial Services, Inc. (CFSI), of Austin, Texas., was founded in 1996 by Walt Col-

lins, its chairman. Originally, Collins gained experience in purchasing debt portfolios from the Resolution Trust Company (RTC). Realizing that the sup-ply of commercial loans being marketed by the RTC and FDIC was finite, Collins began looking for additional opportuni-ties. He determined that there was a large and grow-ing supply of distressed consumer accounts, and that banks and other creditors would soon begin to sell those accounts in large volumes. Collins followed his hunch, and today CFSI has 125 employees, with plans

to hire an additional 75 in the next few months.

The company’s president, Gary Wood, Ph.D., says virtually all banks that issue credit cards or consumer loans are prospective

customers for debt-buying companies, as are retailers that arrange customer loans. Utilities, communica-tions companies and healthcare organizations also sell debt portfolios.

CFSI currently focuses on purchasing debt port-folios from banks, but also wants to begin buying portfolios from communications companies. Wood adds that a bank or other creditor will typically use traditional collection tactics in addition to selling debt portfolios.

“Each issuer is an ad-hoc player here,” he says. “Their decisions are based on internal needs at the moment, and the reason they sell debt is to manage cash flow.”

While portfolio prices are low compared to the cumulative value of the individual debts, the creditor receives cash for loans that had already been charged off, Wood explains. By selling debt portfolios, compa-nies also avoid the time and financial costs associated with administering or overseeing collection efforts.

Such sales are initiated by creditors who usually negotiate directly with debt buyers. “It’s always the creditor who will approach the market; they sell the

paper themselves,” he says. When CFSI considers a purchase, it uses

its proprietary DebtScrubber software to analyze the thousands of debts that com-prise a portfolio. The software assesses the size of the average individual debt, the last payments on individual debts, the average charge-off, last charge-off, the time remain-ing before debt statutes make collection impossible, and other factors.

“It’s impossible to analyze a portfolio on an Excel spreadsheet. With DebtScrubber, we have a 10-min-ute turnaround time,” says Wood. “Once the portfolio has passed that initial screening, it undergoes further analysis before a purchase is made.”

A fraction of the individual debts that CFSI pur-chases as part of a portfolio are resold within a net-work of 600 collection law firms that specialize in collecting debts incurred within various states. Some of the remaining debts are worked by CFSI’s own collection agents, while others are placed with col-lection attorneys for legal action.

Wood regards CFSI’s reputation for integrity and professionalism as a crucial factor in the company’s sustained growth. CFSI has never failed to purchase debt when it has promised to do so, he says, and adds that CFSI handles all media documents, such as credit card statements or loan applications in a professional and confidential manner. Put-backs—debts that are linked to deceased debtors or those who have filed for bankruptcy—are likewise treated carefully and returned to the creditor. Wood added that CFSI also is quite diligent in complying with all applicable consumer credit laws. That diligence greatly reduces potential legal exposure for both the company and its customers, he says.

With aid from that reputation, Wood sees continual growth for CFSI. Consumer debt continues to rise, and more companies are viewing debt portfolio sales as a supplement to recovery efforts.

Collins Financial Services, Inc.www.cfsi.net800-570-5007

CFSI Purchases Debt Portfolios From Banks

“It’s impossible to analyze a portfolio

on an Excel spreadsheet. With Debt-Scrubber, we have a 10-

minute turn-around time.”—Gary Wood,

Ph.D., President

By Richard S. Buse

32 Collection Advisor January/February 2004 33Collection Advisor January/February 2004

OSI Uses Research Techniques to Determine Portfolio Value

OSI Portfolio Services, Inc. (OSI PS), headquartered in Atlanta, employs 200 collection

agents, with an additional 300 outsourced employees servicing the company’s acquired debt portfolios. OSI PS is one of 16 operating companies that comprise Outsourcing Solutions Inc. (OSI), which is based in St. Louis.

Bryan Faliero, corporate executive vice president and chairman of OSI Portfolio Services, says OSI acquired Account Portfolios in 1995 because it viewed its debt-buying expertise as a valuable part of a suite of credit management and accounts receiv-ables services. “The strategy all along was to provide a full range of receivables tools for our clients,” he says. Today, OSI PS purchases debt portfolios from credit card issuers, automobile loan companies, retailers,

healthcare providers, student loan companies, governmental units and utilities.

Some of those portfolios are acquired in sales arranged by brokerage services, while others are purchased directly from cred-it issuers. OSI PS also maintains an in-house sales department and seeks buying opportunities within industries that might be

under-served by other debt buying organizations.Faliero says that OSI PS conducts extensive research

to determine whether a debt portfolio purchase is worthwhile. “We have built sophisticated pricing models to review a portfolio. We are very disciplined in sticking to those models,” Faliero explains.

The prices OSI PS offers for debt portfolios are based on that analysis. Because of that practice, Faliero says that OSI PS will only acquire 5-10 percent of the portfolios for which it has submit-ted bids.

The first step for OSI PS in servicing acquired debt is to almost always use its own in-house collec-tion agents to work accounts, followed by placing the portfolios with one of 26 certified collection agencies

managed by OSI PS. Other debts are placed within OSI PS’s legal network of 53 certi-fied law firms that specialize in debt recov-ery. Some of the remaining debts are sold in portfolios to secondary debt purchasers.

Faliero says creditors will sell debt port-folios for a variety of reasons. For example, there can be considerable time and cost associated with repeatedly contracting with contingency fee-based collection agencies

to recover the same debts. Companies also can gain an immediate boost in

cash flow that will reflect positively on quarterly or annual earnings statements, he says. And, by selling debt, companies distance themselves from those debt-ors. That distance can maintain or enhance a positive company image.

“The debt portfolio industry offers considerable opportunities for growth,” says Faliero. “This really started with the savings and loan crisis, but once credit card companies began selling their debt as an ordinary course of business, other industries saw this as a tool they could use.”

That expansion plays to OSI PS’s strengths. “I see the market continuing to expand into new industries, and we are willing to acquire debt across all indus-tries.” The company’s willingness to purchase debt from a variety of industries is aided by its long term visibility in the marketplace, as well its capabilities for determining the value of debt portfolios.

“We believe we have stronger pricing models, and because of that, I believe we make fewer acquisition mistakes,” he says.

Faliero cited as an additional strength OSI PS’s abilities to support the portfolios it acquired. That support includes the ability to internally handle portfolios that include fraud cases, deceased debtors, bankruptcies and other exception items. “Being able to offer such support can further set OSI PS apart from other debt buyers,” says Faliero.

Outsourcing Solutions Inc.www.osioutsourcing.com800-487-2005

HIGH5

Debt Buyers

“We have built sophis-ticated pric-ing models that we use to review a

portfolio, and are very dis-

ciplined in sticking to

those models.”—Bryan

Faliero, corpo-rate executive

vice present and president.

By Richard S. Buse


PRS Assets Focuses on Price, Composition

PRS Assets, LLC, in Denver, Colo., was founded in 2001 as a separate entity from its parent

company, Professional Recovery Systems, LLC. Today, PRS has 15 in-house employ-ees, and outsources work to 25 collection agencies and three networks of law firms that specialize in collection efforts.

J.P. Kelso, president of PRS Assets, explains that his organization focuses solely on acquiring debt portfolios, rather than engaging in any collection efforts itself. Because of that focus, PRS Assets was established as a separate organization.

PRS acquires portfolios for law firms or collection agencies that specialize in recovering debt based on state or region, industry, or the type of debt that was incurred. Some portfolios also are acquired for indi-vidual or institutional investors who then seek PRS’s

consulting expertise in managing those port-folios.

“We purchase a wide range of receivables,” says Kelso. “The major-ity of those receivables are credit card debts

from primary and private label issuers, and are sup-plemented by installment contracts issued by retailers and health clubs, as well as loan deficiency contracts from automobile loan companies, debts incurred by customers of check-cashing centers, and Chapter 13 bankruptcy debts.”

“PRS Assets focuses on the price and composi-tion of the portfolios and whether they would be a good fit for its customers, providing the company a great deal of flexibility in determining which types of portfolios would be appropriate,” says Kaye Drei-fuerst, vice president. “We’re not stuck into a box: we make decisions based on price and fit. We are a bit more nimble.”

Kelso adds that many of those acquisitions origi-nate with referrals made to creditors on PRS’s behalf by collection agencies and the other entities for

which the company purchases portfolios.For creditors, there are a variety of ben-

efits associated with selling debt, as opposed to trying to recover it. “Banks know their portfolios better than anyone,” says Kelso. “They can predict charge-offs and base their interest rates on that. Once those charge-offs have been taken, the bank can immediately improve its bottom line by selling that debt.”

Selling debt also is less distracting to company operations than recovery efforts. “It’s key for these companies to stay focused on their core businesses,” he says. “They issue credit, and are not in the collec-tion business.”

The debt portfolio industry is becoming more refined and profit margins are becoming thinner; customers also are expecting more from debt-buying organizations. “I see a continual emphasis on service,” says Dreifuerst.

Barbara A. Bader of B.A. Bader and Associates, P.C. says PRS Assets’ emphasis on offering greater exper-tise and service was crucial in helping her establish a law firm that specializes in debt collection.

“Their expertise is truly valued by us, and it was a pleasure to have PRS consult with me in prepar-ing for the opening of my law firm that specialized in collections,” she says. “I was extremely impressed with Mr. Kelso’s working knowledge of the subject of debt collection in the purchase of debt, as well as the day-to-day operations of the business and personnel management.”

While the market is becoming more sophisticated, Kelso also sees considerable opportunities for expan-sion and growth. “I think it’s an ever-growing market, expanding into different industries. As the industry continues to refine itself, many with bigger pockets are becoming involved.”

PRS Assets, LLC800-308-5101

HIGH5

Debt Buyers

“We’re not stuck into a

box: we make decisions based

on price and fit. We are a bit

more nimble.”—Kaye

Dreifuerst, vice president.

By Richard S. Buse


Sagres Works in Consumer Deficiency Balance Contracts

The Sagres Company of San Diego, Calif., was founded in 1993 by Chief Executive Officer

Tom Ferris with seed capital provided by investors. Within five years, those investors were paid back, and Sagres now oper-ates independently, purchasing portfolios independently and occasionally, with joint venture partners from the industry. Sagres employs 50 people at its headquarters facility, and is considering adding an equity partner to fund further expansion.

Ferris became interested in founding a debt-buy-ing business while raising investment dollars for West Capital, an organization involved in purchasing the assets of distressed financial institutions through the Resolution Trust Corporation (RTC). While the RTC had a limited amount of remaining portfolios to sell, Ferris foresaw an ongoing commercial market

for debt sales.Today, 80 percent of the debt portfolios

Sagres purchases are comprised of con-sumer deficiency balance contracts. Fer-ris feels this market offers considerable opportunity for his company. “The busi-est part of the industry has been credit cards, but there are all types of customers across the United States who have been extended credit,” he says.

Sagres typically purchases its portfolios from large banks or financial companies, as well as some portfo-lios from trade schools, automobile loan providers and other small businesses. Its portfolios are comprised of debt accounts from across the United States. Sagres then sells many of those accounts based on state, region or product, to collection attorneys, collection agencies and investors. Portions of portfolios also are sent to Sagres’ in-house collection department for recovery. The remaining accounts, considered ware-housed product by Sagres, are later resold at market price to other debt buyers.

Ferris says that debt selling is not a replacement for traditional collection efforts, but another option that companies which extend credit can employ. “I don’t

believe debt selling is an either/or situation; it’s just another tool in the toolbox for a successful recovery effort.”

According to Ferris, the primary benefit companies derive from selling debt is an immediate improvement in cash flow. “Many times, it makes sense to sell the accounts in order to make quarterly or annual results,” he says. “Selling debt also enables organiza-tions to focus their time and attention on

other efforts. It allows the recovery department to concentrate on what’s most important.”

Since founding Sagres, Ferris has seen grow-ing awareness and acceptance for selling and buy-ing debt portfolios. “I think this industry has gone mainstream. You see not only investors involved now, but you also have the collection attorneys and the contingency collection agencies participating.”

As part of that growth, he says the industry must become legislatively active to ensure that privacy statutes or other related legislation is fair to both businesses and consumers. He also sees tremendous market opportunities in insurance subrogation and healthcare debt, and debt portfolio sales could pro-vide many cash-strapped local and state governments with a means for combating budget shortfalls.

Sagres’ status as a privately held corporation enables it to capitalize on opportunities in a rapidly changing marketplace. “We’re largely driven by our own capital,” says Ferris. “That gives us flexibility, and one of our hallmarks has been creativity.”

Ferris adds that Sagres’ emphasis on engaging in fair financial dealings with all of its customers guides future growth, and what promotes that fairness is the attention the company devotes to analyzing the portfolios it buys and sells. “The Sagres Company has the ability to evaluate a debt portfolio as well as any competitor,” he says. “We’re very disciplined in our evaluation methodology. That enables us to resell debt at a very fair price.”

The Sagres Companywww.sagresco.com800-347-3981

HIGH5

Debt Buyers

“I don’t believe debt

selling is an either/or situ-ation; it’s just

another tool in the toolbox for

a successful recovery effort.”—Tom Ferris, CEO.

By Richard S. Buse


David Rosenberg established UniFund in 1986 in Cincin-nati, Ohio, and was only 20

years old when he began this company for the sole purpose of buying distressed accounts receivable. UniFund was one of the first companies to explore this niche of the collection industry.

As founder and CEO, Rosenberg mod-estly describes UniFund as a company that buys and liquidates distressed assets, but in real-ity, the company does much more than simply “buy paper.” UniFund currently owns millions of accounts worth billions of dollars. Using internal departments comprised of 50 employees, the company offers collection analysis with a mission to maximize the

recovery potential of these accounts, and assist other companies with

existing and potential portfolios. Consumer credit is a booming business. More than

$1.8 trillion in consumer credit debt exists in the United States alone. Assuming an expected default rate of 4 to 6 percent clearly predicts the continu-ing rise of distressed receivables. UniFund currently purchases in excess of $4 billion in distressed accounts annually, and offers a variety of services for outside collection and portfolio acquisition companies.

UniFund uses more than 7,000 proprietary pro-grams to analyze and rate portfolios. Portfolios are segmented based on industry or customer request. Specialized systems are available for outside custom-ers to evaluate portfolios before purchase. Outside customers also use these programs to rescue existing challenged portfolios.

Another niche market served by UniFund involves distressed and challenged collection portfolios. Col-lection and credit companies, along with portfolio buyers, use internal systems to attempt collection. After exhausting all efforts, a high volume of the accounts can remain uncollectible. UniFund offers an alternative to write off the existing debts by pro-viding analysis to rescue potential bad debts based on

a review of existing company policies and procedures. Recommendations are then made for changing policies and procedures to increase collection efficiency. UniFund includes recommendations on handling accounts based on proprietary analytical programs. Recommendations are made on which accounts to rework internally, or send to litigation, call centers or third-party collection agencies.

The company offers outside customers a unique regenerative ability based on successful philosophies and practices developed for internal use. According to Rosenberg, most collectors limit their ability to collect by attempting to shorten the collection life cycle. Shortening the cycle has historically resulted in lower collection rates. By analyzing the accounts, UniFund helps collection clients determine when a debtor may be able to pay.

Rosenberg believes a vast majority of debtors are unable to pay due to changes in circumstance. For example, a debtor loses his or her job, has an ill-ness or accident, or experiences some other major life change. Although the debtor is currently unable to pay, there still is a desire to pay the debt. Such accounts require a long-term strategy to be effective. Using the UniFund philosophy allows collectors to focus efforts on determining the timeline for pay-ment rather than overwhelming debtors with collec-tion calls. Rosenberg believes collection calls during the detrimental life change only serve to complicate the collection process.

Tools developed by UniFund allow portfolio buy-ers and collection professionals to become more intellectual than clerical. By using technology to handle clerical tasks, collection professionals have time to analyze data for increased efficiency.

UniFundwww.unifund.com513-489-8877

UniFund Uses ProprietaryTechnology to Rescue Distressed Assets

HIGH5

Debt Buyers

UniFund offers an

alternative to write off the

existing debts by provid-

ing analysis to rescue

potential bad debts based

on a review of existing com-pany policies

and procedures.

By Mona B. Tidwell