U.S. Debt Collection Agencies: An Industry Analysis

(8TH Edition – April 2012)

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This business information report has been independently prepared by utilizing a comprehensive variety of “primary” and “secondary” information sources and techniques, including: in-depth telephone interviews, analyses of other market surveys, trade journals and trade association research, competitor literature, government Census and other data, custom searches of business databases, combined with original Marketdata compilations, analyses and forecasts.

Information in this report was carefully selected to represent ONLY the most pertinent and up-to-date material for informed decision making, forecasting, and planning…the historical, current, and projected size and growth of the total industry and sub-segments comprising the market, the nature of end-user demand, major industry trends and issues, industry structure, competitor profiles and key operating ratios.

This “off-the-shelf” report is equally applicable to: owners/management of collection agencies, suppliers of software and services for agencies, corporate credit managers, banks and other financial institutions, securities analysts/brokerage firms, industry consultants, venture capitalists and private equity fund managers., merger & acquisition candidates, and industry trade associations.

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Executive Overview of Major Findings

Industry Characteristics & Definition . . .

“Adjustment and Collection Services” (Census Bureau NAICS code 561440, formerly SIC code 7322) includes establishments primarily engaged in the collection or adjustments of claims, other than insurance. Establishments primarily engaged in providing credit card service with collection by a central agency are not classified in this industry. The following specific services are included within this industry segment: accounts receivable management, collection business of current and past-due accounts, and specialized billing programs.

Collection agency owners have concerns about competition, technology, and liabilities. Those that are already savvy to the new environment are strengthening their businesses in a variety of ways. Some are growing internally, others are positioning themselves to make acquisitions or to be acquired. Another area of new business generating significant revenue is the outsourcing of activities by credit grantors. Others are joining forces to compete for business from the new larger credit grantors. These companies have exerted pressure on the agencies themselves, driving rates down, and requiring broader geographic coverage and a more sophisticated range of services.

Competition is based largely on recovery rates, industry experience and reputation, and service fees.

Competition has also intensified due to the creation of larger economies of scale and the consequent shift toward lower communication expenses. The need for branch offices has diminished due to the ability to call customers cheaply from anyplace in the United States, and even from abroad.

How Recession-Proof Is The Industry?

There are a variety of factors affecting demand for and health of debt collection services, as follows:

The state of the overall economy, employment rates Consumer debt service levels and the availability of credit The number of personal bankruptcies The number of foreclosures – health of the real estate market The industry’s recovery rate, the collectability of accounts Funding for buyers of bad debt Consumer complaints about the industry’s practices Government regulation by the FTC and State Attorneys General offices, fines and actions

taken against companies that violate the Fair Debt Collection Practices Act (FDCPA) New technology is making it profitable for even very small home-based entrepreneurs to

get into the debt collection business. Outsourcing of collections to other countries such as India Outsourcing to private collection agencies of the collection of its delinquent accounts from

the IRS and for child support.

The general view is that economic downturns produce a surge of bad debt, which, in turn, creates more accounts for the collections industry, but is balanced by a decrease in collectability.

Up until recently, many felt that the collections business was recession -proof. With this downturn, they’ve been proven wrong. Usually, during a recession collection agency

revenues do grow somewhat or are flat, while profits suffer. An actual decline in revenues is rare, but debt recovery rates may drop.

A quote from industry leader NCO Financial Systems tells all:

“Typically during an economic downturn, we experience a decrease in collectability and an increase in placements due to rising delinquencies. Although we have seen the decrease in collectability and the rise in delinquency rates, the overall increase in volume has not materialized as we would have expected. We attribute this primarily to a reduction in the amount of credit extended by our clients in conjunction with lower consumer spending. Additionally, decreased overall credit card activity has resulted in reductions in volume with certain of our core active account management services such as fraud calling.

While delinquency rates have risen dramatically year over year, please keep in mind that delinquency percentages in many cases are being applied to a lower base of actual credit. Many credit granters are also using aggressive strategies to assist borrowers in avoiding delinquencies.

These strategies, in conjunction with an increase in bankruptcy, have the unplanned impact of reducing the number of delinquent and charge off accounts that are available to go to outside vendors. Additionally, the current economy has led many credit granters to initiate the litigation of accounts at an earlier stage in delinquency.” The ACA International, the industry’s trade group, states it is a myth that: “Economic doom means collection business boom.” While more accounts are placed with professional collectors during a recession, those accounts are also less collectible. When people are unemployed and businesses are struggling, bills do not get paid. Furthermore, a prolonged recession with decreased buying and selling of goods and services on credit eventually translates into a contraction.

Consumers are becoming more cautious about accumulating debt. They are doing a better job of paying their bills, causing delinquency rates and charge-off rates to fall to 10-year lows. While the growth of consumer debt is slowing, however, it continues to set new records. Consequently, there is still plenty of debt to collect. In addition, the debt to disposable income ratio for consumers is at or near a record high.”

The accounts receivable management and collection industry is highly fragmented. Competition is based largely on recovery rates and service fees, industry experience and reputation. Large-volume credit grantors typically employ more than one accounts receivable management firm at a time, and often compare performance rates and rebalance account placements towards higher-performing servicers.

How Many, How Large?

Based on information obtained from ACA International and others, there are approximately 4,500 accounts receivable management and collection companies in the United States—a number that has changed little over the past decade.

The majority of them are small, local businesses. According to the 2007 U.S. Census Bureau Survey, there were 5,104 Adjustment and Collection Service “establishments” in operation at that time—down slightly from 2002 (5,265).

The debt collection industry used to be characterized as small, local businesses with shady reputations at best. However, since the late 1970s, the collection agency industry has been transformed into nationwide companies with “hundreds of closely supervised collectors and computerized operations.” The industry has been changing rapidly during the past several years.

According to the 2007 Census, there were 175 collection agency companies with more than $10 million in yearly receipts. Through multiple mergers and acquisitions, this trend toward industry consolidation at the top of the revenue chain continues.

Major industry consolidation remains a practical impossibility. The industry is too fragmented, and entry costs are very low. Many establishments have only a half-dozen to a dozen employees, and a tremendous variation in market strategy and business modeling among the smaller players remains. Many work in niches where markets do not overlap each other. In addition, although we noted the increase in large clients, certain clients, such as utilities, will remain regional or local for the foreseeable future, and will probably hire local, rather than national, collections firms. As a result, Marketdata believes there will always be a large number of small companies.

How Successful?

The average recovery rate is 18%, a number that has remained unchanged for 15 years. This figure is dubious because there are so many variables it can not be an apples to apples comparison. Medical debt has a much higher recovery rate and is always easier to collect than credit card debt. Much of medical debt is simply a factor of improper filing of insurance paperwork. Collection agencies are able to help with this and collect the funds for their clients. Cell phone companies are horrible at debt collecting as they are too busy handling new customers. This debt is highly collectible.

Utility debt, however, is difficult to collect as these people are truly destitute and unable to pay or the debtor has moved and can’t be located.

Recovery rates also vary by state. Texas is known to be a debtor haven as the laws there favor debtors. Florida is another state with similar laws. In general, recovery rates vary dramatically by type of account and not much emphasis can be put on the “industry average” figure.

Up until the most recent recession, industry profitability had risen, but not because the quality of the accounts had improved. Rather, it’s due to collections firms working smarter. Technology plays a role here. They key is controlling labor costs. Telephone/outbound calling technology has helped in this regard.

As for industry profit margins, debt buying is VERY profitable and has grown a lot recently. It is one of the reasons why the industry profitability has gone up. Better predictive dialing systems and call centers also increase profitability. There are a lot of factors favoring more profitability.

Outsourcing is always a hot topic in this business. Omnium management is of the opinion that business is coming back to “near-shore” locations and Canada. They also feel that companies that shifted operations to India, for example, saved on labor costs but they underestimated the “soft costs” related to these facilities. For example, a lot more executive or supervisory time is required (by United States-based workers), to oversee these foreign workers and resolve problems with accounts. Higher level collections require more supervision.

More….

Operating Ratios & Structure of The Industry…

Highlights of the 2007 and Prior U.S. Census Surveys

NUMBER OF ADJUSTMENT AND COLLECTION SERVICES

According to the 2007 Census of Service Industries (latest available), there were 5,104 Adjustment and Collection Service “establishments” in operation at that time, down 3% from the 5,265 in operation in 2002. Census Bureau figures are always lower than the actual activity in the marketplace, since the government survey does not include the smallest operations with no payroll (i.e. one or two-person operations). Industry sources such as The Collection Agency Report (First Detroit Corp.), consultants and major competitors all claim that there really are about 6,500 agencies operating today.

The Census reported that these 5,104 establishments had revenues of $12.07 billion in 2007, versus $8.83 billion in 2002 and $5.08 billion in 1997. This implies an average annual growth rate of 13.7% from 1997 to 2007.

Average annual revenues per establishment were $2.3 million in 2007, vs. $1.68 million in 2002, and $968,000 in 1997 and $636,000 in 1992. The collections establishments generated 37% more dollars in 2007 than in 2002. These debt collection services employed 140,618 workers in 2007, versus 129,822 workers in 2002, and 84,333 workers in 1997.

According to the 2007 Census Survey, average annual receipts per employee in the industry were $86,347. This is remarkably similar to the figure that comes from The American Collector’s Association 2008 Benchmarking/Cost of Operations Survey. The latter calculated revenue per employee at $86,700. The ACA survey also found that collections per employee were $245,000.

15-year Snapshot of the Collection Agencies Industry: 1992-2002

1992 1997 2002 2007

Establishments 5,814 5,250 5,265 5,104

Industry receipts($ bill.)

$3.70 $5.08 $8.85 $12.07

Avg. yearly receipts per Estab. ($ 000) $636 $968 $1,681 $2,306

Payroll as % receipts 42.3 41.9 42.3

Top 50 firms market share

30.3 34.5 45.6 45.8

Single-unit firms’ shareOf receipts 64.6 58.2 46.6 44.6

Single-unit firms as % All firms 92.8 92.5 92.2 92.3

Source: U.S. Census Bureau, Marketdata calculationsNA - data not available, until late 2010

More….

Consumer ComplaintsAbout Collection Agencies

Summary…

U.S. Gets Tougher On Debt Collectors

The U.S. debt collection industry is booming, as many Americans struggle to pay their bills or walk away from what they owe. However, at the same time, complaints about debt collection tactics have surged, with some consumers alleging they were illegally hounded with late night phone calls, harassment of family and friends, and threats of jail if they don’t agree to pay.

The FTC received a record-high 164,361 complaints against the debt collection industry as of Dec. 8, 2011 . In the same period, the agency brought four enforcement actions against debt collection firms.

FTC officials said they are working harder than ever to catch debt collectors that break the law. In March of 2011, West Corp.’s West Asset Management unit agree to pay $2.8 million to settle allegations that included threatening to physically harm people who owed money.

A settlement with Asset Acceptance Capital Corp., one of the nation’s largest buyers of consumer debts, is the second-biggest penalty ever levied by the FTC against a debt collector. Officials said they are investigating other companies for alleged violations of federal law and expect to announce more enforcement actions soon.

One of the key issues of the U.S. government’s effort is what it calls the increasingly common practice of pursuing debts that have expired under the statute of limitations. People who stop paying their bills get their credit ratings punished but eventually are freed of old debt under laws that vary by state. The time frame ranges from 2 years to more than 15 years, according to the FTC. If a debtor agrees to make even a single payment on an expired debt, the clock starts over on some part of the old obligation, a process the industry calls “re-aging”.

Collection firms can profit handsomely by convincing borrowers to pay even a fraction of the debt, since they buy these accounts for pennies on the dollar.

Delinquent loans bought in bulk by Asset Acceptance often come with skimpy details about the original debt, such as credit agreements or payment histories, the U.S. government said in its suit. As a result, the company sometimes goes after people for expired debts that they have never owed.

The FTC has a database called Consumer Sentinel, which now holds about 6.1 million complaints.

The FTC said officials target their enforcement firepower so it will have the maximum impact on consumers and a strong deterrent effect on other collection companies. The FTC also uses the database to spot new problems before they spread more widely.

The biggest subject of complaints so far this year has been Portfolio Recovery Associates Inc., a buyer of distressed consumer debts.

Recent State Actions…

An estimated 588 different collection agencies and creditors were sued in the second half of February 2012, according to WebRecon LLC, a Grand Rapids, Michigan research firm that compiled the data from U.S. District Courts.

The 526 total lawsuits filed under consumer statutes in the Feb. 16-29 period rose in three key categories compared with the first half of the month. Fair Debt Collection Practices Act (FDCPA) lawsuits rose to 422, up 7.9%; Fair Credit Reporting Act (FCRA) cases totaled 129, up 25.2%; and there were 37 Truth-in-Lending Act (TILA) lawsuits, up 37%. Telephone Consumer Protection Act (TCPA) lawsuits held steady at 44. Several legal actions cited more than one alleged violation.

"Year-to-date, FCRA and TCPA continue to show strong growth over 2011, while FDCPA is on pace with last year’s number and TILA is considerably lower. Expect FDCPA and TILA to pick up as the year goes on," says Jack Gordon CEO at WebRecon.

Total lawsuits for the year reached 1,968, including 1,685 citing alleged FDCPA violations.

According to a Jan. 2011 Wall Street Journal article, bill collectors face new disclosure Rules.

Bill collectors in New Mexico will be soon required to inform borrowers they can’t be taken to court for long-overdue debts, changing the landscape for consumers and creditors in the state.

Since April 2010, New York City has required debt collectors to notify consumers in writing if the debt has passed the statute of limitations, known as the “time barred.”

Wisconsin and Mississippi have laws that not only eliminate the right to sue on time-barred debts but extinguish the debt entirely.

The statute of limitations is four years for most credit card debt in New Mexico.

“One of the abuses in the debt-collection industry was debt collectors who would misrepresent to people what the risks were about very old debt,” said Jonathan Mintz, commissioner of the New York City Department of Consumer Affairs. “People can make old debts fresh again by making partial payments.”

“Consumers are not aware that collectors cannot lawfully sue to recover on time-barred debt”, the FTC said in July.

History and Legislative Background…

Debt Collection Practices

The Fair Debt Collection Practices Act (FDCPA) was passed in 1977. The FDCPA prohibits deceptive and unfair debt collection practices, and it imposes certain affirmative duties on debt collectors. Congress enacted the FDCPA in response to what it saw as an increasing incidence of consumer abuse by debt collectors. This abuse included practices that appeared designed to inflict severe emotional distress and otherwise to injure consumers by invading their privacy, damaging their reputations and intimidating them into taking actions they might not have been obligated to take.

Frequently reported tactics included:

Sending debtors phony legal documents threatening court action to force payment; Harassing debtors at home and at work with multiple calls in short periods of time; Impersonating attorneys, policemen and other authority figures; and Threatening bodily harm or even death to either the purported debtor or his or her family.

Congress concluded that such "collection abuses by independent debt collectors are serious and widespread and that existing state laws are inadequate to curb these abuses." It declared that the purpose of the Act was "to eliminate abusive practices, not disadvantage ethical debt collectors. (MARY L. AZCUENAGA, COMMISSIONER, FEDERAL TRADE COMMISSION speech, 1994)

The Collection Practices Act prohibits abusive, deceptive, and otherwise improper collection practices, while it permits reasonable collection efforts that promote repayment of legitimate debts. Thus, the Commission's enforcement goal is to ensure compliance with the Act without unreasonably impeding the collection process. The Commission recognizes that the timely payment of debts is important to creditors and that the debt collection industry offers useful assistance toward that end. The Commission also appreciates the need to protect consumers from those debt collectors who engage in abusive and unfair collection practices.

Congress enacted the FDCPA in an effort to balance the debt collector's right to recover just obligations with the consumer's right to protection from harassment, deceit, invasions of privacy, interference with the employment relationship, and other abusive collection tactics. Many members of the debt collection industry supported this legislation when it was proposed, and most debt collectors now conform to the standards the Act imposes.

More…

Major Industry Trends & Factors Affecting Demand

Summary…

There are a variety of factors affecting demand for and health of debt collection services, as follows:

The state of the overall economy, employment rates Consumer debt service levels and the availability of credit The number of personal bankruptcies The number of foreclosures – health of the real estate market The industry’s recovery rate, the collectability of accounts Funding for buyers of bad debt Consumer complaints about the industry’s practices Government regulation by the FTC and State Attorneys General offices, fines and actions

taken against companies that violate the Fair Debt Collection Practices Act (FDCPA) New technology is making it profitable for even very small home-based entrepreneurs to

get into the debt collection business Outsourcing of collections to other countries such as India Outsourcing to private collection agencies of the collection of its delinquent accounts from

the IRS and for child support.

Despite conventional wisdom, collection agencies don’t prosper when the economy stumbles. Although agencies are chasing down more late bills on behalf of doctors, banks, landlords and others, their revenue isn’t growing because delinquent customers are having a harder time coming up with the cash. They have to make more calls and contact more people to get the same amount of money.

Work Volume Has Risen During This Recession…

What is currently being seen is businesses that have never seen the need before are now contacting a third-party collector. The surge in collection accounts has been a boom to some, but a bust for others.

Businesses are waiting too long to send delinquent accounts to collections, many observers say. Richard Billman has been a debt collector for almost 35 years, and has been with Las Vegas-based Quantum Collections since 1976. Today, as the company’s executive vice president, he laments how medical clients hang onto past-due accounts until it is too late.

Effects of the recession different this time

According to a recent NCO quarterly report:

“Typically during an economic downturn, we experience a decrease in collectability and an increase in placements due to rising delinquencies. Although we have seen the decrease in collectability and the rise in delinquency rates, the overall increase in volume has not materialized as we would have expected. We attribute this primarily to a reduction in the amount of credit extended by our clients in conjunction with lower consumer spending. Additionally, decreased overall credit card activity has resulted in reductions in volume with certain of our core active account management services such as fraud calling.

While delinquency rates have risen dramatically year over year, one should keep in mind that delinquency percentages in many cases are being applied to a lower base of actual credit. Many credit granters are also using aggressive strategies to assist borrowers in avoiding delinquencies.

These strategies, in conjunction with an increase in bankruptcy, have the unplanned impact of reducing the number of delinquent and charge-off accounts that are available to go to outside vendors. Additionally, the current economy has led many credit granters to initiate the litigation of accounts at an earlier stage in delinquency.”

Consumer debt and delinquencies have increased…

Total consumer revolving and non-revolving credit has risen at a 12.8% average annual compound rate between 1992 and 2011, rising from $806 billion to over $2.49 trillion. Part of this rise was due to the low interest rate climate of the 1990s. This large rise in indebtedness did not lead to a corresponding rise in overall household fixed obligations for homeowners. For them this rose from just over 14% to 16% of disposable personal income. For renters this ratio rose from over 23% to over 31%.

Revolving credit reached a peak of $992 billion in 2008, but has come down 20% since then as people pay more often with cash and trimmed their spending.

Consumer Credit Outstanding and Household Fixed Obligation Ratios

Consumer Credit  OutstandingSeasonally Adjusted(billions of dollars)

Household Fixed Obligation Ratio as a Percentage of Disposable Personal Income

Total Revolving Credit

Nonrevolving Credit

Renters Homeowners

1992 $806.1 $278.5 $527.7 23.4 14.31993 865.7 309.9 555.7 23.9 14.21994 997.1 365.6 631.6 25.2 14.51995 1,141.0 443.5 697.5 27.0 15.21996 1,242.9 499.6 743.2 27.3 15.41997 1,313.1 529.8 783.4 27.3 15.51998 1,416.8 578.9 837.8 28.3 15.21999 1,530.4 607.6 922.8 29.4 15.52000 1,705.1 677.7 1,027.4 30.6 15.72001 1,842.2 722.3 1,119.9 31.8 16.22002 1,924.2 738.3 1,185.9 32.2 16.22003 2,037.5 774.9 1,262.6 32.2 15.82004 2,219.4 823.7 1,395.7 31.1 16.02005 2,313.9 850.0 1,463.9 NA NA2006 2,418.3 902.3 1,515.9 NA NA2007 2,551.9 969.6 1,582.3 NA NA2008 2,596.9 992.3 1,604.6 NA NA2009 2,450.1 865.5 1,584.6 NA NA2010 2,408.3 800.2 1,608.1 NA NA2011 2,498.3 801.0 1,697.3 NA NA

Source: Federal Reserve Board

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Industry Size and Growth

Summary…

The accounts receivable management industry has experienced significant growth over the past 20 years, and more than doubling in size from 1997 to 2010. The rapid growth of outstanding consumer credit and the corresponding increase in delinquencies and charge-offs have resulted in credit grantors increasingly looking to outsourcing companies to manage the accounts receivable process across the credit-to-cash cycle.

Growth in the collections industry is naturally tied to the overall economy. However, several other factors come into play—consumer confidence for example, which fluctuates with interest rates, higher oil prices and global instability.

Consumer debt is at near record highs, according to the FDIC. Consumers have been propping up the economy since the recovery from the 2001 recession, boosting personal borrowing to records levels to support gains in consumer spending.

Industry Receipts…

Revenue data for the collections agency segment of the business alone, is available every five years from the Census of Service Industries and annual information is available starting in 1995 from the Service Annual Survey. Following are historical revenues for adjustment and collections services, as reported by the U.S. Census Bureau, along with Marketdata’s estimates for 2011, 2012, and beyond.

The Census Bureau collects several series of revenue information. A complete Census is conducted every five years. While there can be errors in any study, this is as complete and detailed coverage of the industry that exists. Annually, the Bureau conducts a smaller and less comprehensive Service Annual Survey. The two studies do not agree exactly. The Service Annual Surveys are, at least useful for assessing year-to-year growth.

To develop a more complete picture of the economic importance of the third-party debt collection industry, The industry’s main trade group, ACA International (“ACA”) commissioned Ernst & Young to conduct a survey of third-party debt collection agencies. Survey data collection took place between September and November of 2011 to ACA members and non-member contacts which the ACA provided.

ACA provided EY a list of 2,863 collection agencies, to which they sent invitations to the survey website. They received responses from 345 of the agencies identified – a 12% response rate.

Based on data from the Statistics of Income Division of the Internal Revenue Service, the amount of bad debt write-offs claimed by corporations, partnerships, and non-farm sole proprietorships on their tax returns is estimated to be $152.5 billion in 2007.

Third-party debt collections are increasingly working with Federal agencies and state and local governments. In fiscal year 2006, the Federal government referred $17.5 billion in delinquent receivables to private collection agencies (PCAs) resulting in collections of $739.6 million, up from $693.5 million in FY 2005. In the area of Federal student loans, for example, the $651.8

million that PCAs returned to the Department of Education in fiscal year 2006 represents the average loan aid received by 150,288 college students during the 2006/2007 acedemic year.

Department of Labor data indicate that over the last two decades. employment in the third-party debt collection industry has more than doubled, from less than 70,000 in 1990 to over 157,000 in 2007. Based on the survey of third-party debt collectors, it is estimated that industry employment was 148,300 in 2011.

Key measures of industry size and impact include the following:

Agencies recovered approximately $54.9 billion in total debt in 2010, on which they earned $10.3 billion in commissions. Removing commissions from the total debt recovered leaves over $44.6 billion in debt that agencies returned on a commission basis to creditors and the U.S. economy. The five states with the highest total debt collected are Texas ($5.3 billion), New York ($5.3 billion), California ($4.4 billion), Florida ($2.8 billion) and Illinois ($2.7 billion).

Early out debt, consisting of receivables aged 90 days or less, represents 30% of all debt collected; bad debt, which accounts for the remaining 70%, consists of receivables aged 90 days or more.

Health Care related debt is the leading category of debt collection among survey respondents, accounting for more than half of all debt collected in the industry. Credit card/financial debt is the next category with 20% of debt collected. Utility/telecom, student loans, commercial and government debt each make up less than 10% of debt collected.

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Value of The Industry’s Major Market Segments…

The table below shows the total debt collected in 2010 by type of debt, Health Care related debt is the leading category, accounting for more than half of all debt collected in the industry. Credit card/financial debt is the next category with 20% of debt collected. Utility/telecom, student loans, commercial and government debt each make up less than 10% of debt collected.

Debt Type Percent of Total Debt Collected

Health Care 52.2%Credit card/financial 20.0Utility/telecom 7.5Student Loan 5.7Commercial 3.4Government 2.1Other 9.1

Total 100%

More…

Government Tax Debt: A Status Report

Summary…

This is a potentially huge market for collection agencies—with the emphasis on the word “potential”. This is not the first time the topic of the government outsourcing the collection of its delinquent accounts has come up. Back in 1996, the IRS launched a small pilot test program that many declared a failure.

Since 1996, the Financial Management Service has collected more than $47.9 billion in delinquent debt.

The project’s scale was enormous. When fully running, private collectors would have handled an estimated 2.6 million cases per year, the IRS says. Although the actual amounts that would have been collected were thought to be much smaller, the $13 billion given to collectors is more than the $8 billion in receipts for the entire debt collection industry in 2002, said a spokesman for the Association of Credit and Collection Professionals, a trade group.

According to a June 2008 study for ACA International, prepared by PriceWaterhouseCoopers, 3rd party collectors are increasingly working with Federal agencies and state and local governments. In fiscal year 2006, the Federal government referred $17.5 billion in delinquent receivables to private collectors (PCAs) resulting in collections of $739.6 million, up from $693 million in fiscal 2005.

In the area of Federal student loans, for example, the $651.8 million that PCAs returned to the Dept. of Education in fiscal year 2006 represents the average loan aid received by 150,288 college students during the 2006/2007 academic year.

Some history and facts regarding government tax debt: The American Jobs Creation Act of 2004 authorized the Internal Revenue Service (IRS)

to contract with private collection agencies (PCAs) to collect against an estimated $340 billion in delinquent taxes.

The tax gap, estimated at $345 billion for Tax Year 2001, is the difference between taxes that are legally owed and taxes that are paid on time, according to the Treasury Inspector General for Tax Administration, April 23, 2008.

The voluntary compliance rate (the percentage of taxes that are paid voluntarily and on time) is 83.7%, which gives the United States one of the highest tax compliance rates in the world. However, each percentage point of noncompliance costs the Federal Government approximately $21 billion in lost revenue, also according to the Treasury Inspector General for Tax Administration, April 23, 2008.

In 2001, approximately $245 billion in unpaid tax liability was from individual income tax non-compliance.

Finally, despite IRS's collection efforts, a sizeable portion of the unpaid debt inventory—from 31% to 46% during fiscal years 2002 through 2007—was written off due to statutory limits on how long IRS could pursue the debt (Source: Report to the U.S.

Senate Committee on Finance, Tax Debt Collection: IRS Has a Complex Process to Attempt to Collect Billions of Dollars in Unpaid Tax Deb. U.S. Government Accountability Office. June 2008.)

Back in 1996, The IRS in its budget appropriation required it to spend $13 million to start using private agencies in collection activities as part of a pilot program to collect long-overdue taxes in 13 Western States. All payments collected in the program were to be mailed directly to the IRS, not the collection agencies. The contractors would be “paid a fixed price for each successful contact the IRS accepts.”

Initially, the private agencies were given some of the Internal Revenue Service’s toughest cases, including businesses that withheld payroll taxes from employees but hadn’t paid the money to the government. Anxious to avoid potential abuses, the IRS set up some fairly strict rules for private collectors. They couldn’t make house calls, for instance. Instead, they were limited to writing letters and making phone calls—sometimes with an IRS employee sitting next to them. Nor could the companies take in money from people who agreed to pay up. They had to refer the taxpayer to the IRS.

Not surprisingly, the IRS test “failed”. Some industry experts believe the IRS made sure it would fail. It was then put on the “back burner” and appeared to have been lost in the shuffle until recently.

According to the IRS, roughly $120 billion of the $200 billion of delinquent taxes is collectible. The American Jobs creation Act, which President Bush signed in Oct. 2004, created a section of the IRS code that lets private companies collect some of that debt for the first time. Private companies could get to keep 25% of the amount they collect, according to IRS project directors. Individual collectors would identify themselves as employees of their companies, who are working on behalf of the IRS.

Collection agencies with an edge might include three that the IRS worked with to develop the outsourcing program: Aman Collection Service (part of Wells Fargo & Co.), Diversified Collection, and the second largest company in the industry – Outsourcing Solutions (now part of NCO Group). Other large companies that are already engaged in government collections would also stand a better chance. One such example is Pioneer Credit Recovery, inc., a unit of the giant student lender Sallie Mae.

Two categories of debt have been slated for outsourcing: newer accounts awaiting the assignment of a collection agent, and older debt which revenue officers would most likely never have gotten to. (Debts older than 10 years are written off).

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The Leading Collection Agencies:Competitor Profiles

Summary…

The U.S. Census Bureau reported that there were 5,265 collection agency “establishments” (offices or branches of a company), operated by 4,500 companies, which together had revenues of $12.07 billion in 2007. Most of these facilities are small, as average annual revenues per establishment were only $2.3 million. These debt collection services employed 140,618 workers in 2007, versus 129,822 workers in 2002, and 84,333 workers in 1997.

The industry still remains very competitive. In 2007, the four largest firms captured 15% of total industry revenues. The industry’s 50 largest firms captured 45.8% of receipts in 2007, about the same as in 2002.

Revenues of the Leading Collection Agencies($ millions)

2010Sales

2011Sales

2011% chg.

NCO Financial Systems

$1,602 $1,541 E -3.8

Encore Capital 381 467A +22.6

Asset Acceptance Corp.

198 218A +9.9

Coface Collections North America

122E 129E +5.0

iQor (Intellirisk) 476 512E + 7.6

Weltman, Weinberg & Reis Co.

97.5 100 + 2.6

6-firm Total: $2,877 $2,967 +3.1

Table Notes:

E – estimated by Marketdata, based on company’s 9-month results or preliminary company estimates* excluding revenues of $337 million accounted for by acquisition of Outsourcing Solutions

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NCO Group, Inc.

Company Headquarters

507 Prudential RoadHorsham, Pennsylvania 19044 (215-441-3000)

Chairman, President and CEO - Michael J. Barrist

Website: ncogroup.com

Overview & Summary

NCO is the largest collection agency in the U.S., with 2011 revenues of $1.54 billion. It is a public company. On February 29, 2008, the company acquired OSI, a leading provider of business process outsourcing services,specializing primarily in accounts receivable management services, for $339 million in cash.

NCO Group, Inc. is a holding company and conducts substantially all of its business operations through its subsidiaries. NCO is an international provider of business process outsourcing solutions, primarily focused on accounts receivable management (“ARM”) and customer relationship management (“CRM”). NCO provides services through over 100 offices throughout North America, Asia, Europe and Australia. The company provides services to more than 14,000 active clients, including many of the Fortune 500, supporting a broad spectrum of industries, including financial services, telecommunications, healthcare, retail and commercial, utilities, education and government, technology and transportation/logistics services.

These clients are primarily located throughout North America, Asia, Europe and Australia. The company’s largest client during the year ended December 31, 2010, was in the telecommunications sector and represented 7.1 percent of the company’s consolidated revenue excluding reimbursable costs and fees for the year ended December 31, 2010.

NCO provides its services through the operation of 100+ centers that are electronically linked through an international network, with the exception of its two United Kingdom centers. The firm’s call centers utilize predictive dialers with over 5,000 stations to address its low balance, high-volume accounts. Through acquisitions, efficient utilization of technology and intensive management of human resources, it has achieved rapid growth in recent years.

On November 15, 2006, NCO Group, Inc. was acquired by and became a wholly-owned subsidiary of Collect Holdings Inc., an entity controlled by One Equity Partners and its affiliates, with participation by Michael J. Barrist, Chairman, President and Chief Executive Officer of NCO Group, Inc., certain other members of executive management and other co-investors, referred to as the Transaction. Under the terms of the merger agreement, NCO Group, Inc. shareholders received $27.50 in cash for each share of NCP Group, Inc. common stock that they held. On February 27, 2007, NCO Group, Inc. was merged with and into Collect Holdings, Inc. and the surviving corporation was renamed NCO Group, Inc.

During 2010, the firm generated approximately 60% of its ARM revenue from the recovery of delinquent accounts receivable on a contingency basis. ARM contingency fees range from 6% for the management of accounts placed early in the accounts receivable cycle to 49% for accounts that have been serviced extensively by the client or by third-party providers. The average fee for ARM contingency-based revenue across all industries was approximately 17% during 2008, 2007 and 2006.

During 2008, approximately 88% of the firm’s CRM revenue was generated from inbound services, which consist primarily of customer service and technical support programs, and to a lesser extent acquisition and retention services. Inbound services involve the processing of incoming calls, often placed by our clients’ customers using toll0free numbers, to a customer service representative for service, order fulfillment or information. During 2008, outbound services, which consist of customer acquisition and customer retention services, represented approximately 12% of CRM revenue.

Since April 1994, NCO has completed more than 20 acquisitions which have enabled it to increase its penetration of existing markets, establish a presence in new markets, offer additional services, and realize significant efficiencies. In addition, the company has leveraged its infrastructure by offering additional services, including customer service call centers, market research and other outsourced administrative services.

NCO divides its services into accounts receivable management, collection delinquency management, customer relationship management, customer service and support, and billing services. NCO focuses on providing services to clients in the financial services, healthcare, education, retail, commercial, utilities, government, and telecommunications sectors.

NCO has changed their strategy from one of focusing on acquisitions to focusing on internal growth and the successful integration of RMH and NCO Portfolio Management Inc., referred to as NCO Portfolio. NCO has also modified their growth strategy to include expansion into telecommunications, utilities, medical, and other “small balance” accounts receivable. In an effort to improve their efficiency and effectiveness in the ARM industry, NCO is improving collections, reducing cost of services, and purchasing receivables in all stages of delinquency.

In spite of their internal growth focus, NCO has not abandoned strategic acquisitions altogether. The company continues to strive for increased market share in a highly fragmented industry and believes they will discover new acquisition opportunities over time.

NCO has also been pursuing international expansion. NCO has been operating in Canada and the U.K. through wholly owned subsidiaries and is attempting to penetrate these markets by increasing sales in accounts receivable management. The company intends to pursue expansion in Australia, Eastern Europe, Central America, and the Caribbean. They already have operations in Canada, the Philippines, India, Barbados and Panama that support clients in the United States. In fact, in January 2005, NCO completed an acquisition of International Market Access SRL; formerly a subcontractor. Company History

In 1986, NCO’s predecessor company, National Collections Office, was a small, family owned collection agency run by the present CEO’s parents with two part-time employees. At that time, Michael Barrist’s parents wanted to sell the family owned business. Barrist, then a CPA with US Healthcare, decided to buy it. In 1986, NCO’s annual revenue was just $30.8 million.

Client Base

The company provides services to more than 14,000 active clients, including many of the Fortune 500, supporting a broad spectrum of industries, including financial services, telecommunications, healthcare, retailand commercial, education and government, utilities, education, technology and transportation/logistics services.

These clients are primarily located throughout North America, Europe and Australia. The company’s largest client is in the telecommunications sector and represented 9.1 percent of the company’s consolidated revenue for the six months ended June 30, 2009. The company also purchases and collects past due consumer accounts receivable from consumer creditors such as banks, finance companies, retail merchants, utilities, healthcare companies, and other consumer-oriented companies.

The firm has grown rapidly, through both acquisitions as well as internal growth. On January 2, 2008, it acquired Systems & Services Technologies, Inc. referred to as SST, a third-party consumer receivable servicer, for $17.7 million. On February 29, 2008, it acquired Outsourcing Solutions, Inc., referred to as OSI, a leading provider of business process outsourcing services, specializing primarily in accounts receivable management services, for $339 million.

During 2008, the company also acquired several smaller companies, all of which were providers of ARM services, for an aggregate purchase price of $9.3 million which was paid in cash. On January 9, 2007, it acquired Statewide Mercantile Services, referred to as SMS, a provider of ARM services in Australia for approximately $2.1 million, which included SMS’s portfolio of purchased accounts receivable.

Profile Continued…

INTRODUCTION - STUDY SCOPE & INFORMATION SOURCES USED

A major source of public information about any industry or market analyzed by Marketdata is the U.S. Government--the most prolific producer of business information in the world. The NAICS (North American Industrial Classification System) --formerly: Standard Industrial Classification or SIC codes System) was created to allow for the uniform collection and analysis of economic, marketing and financial statistics about all sectors of the U.S. economy. A 6-digit numerical code is assigned to each industry.

This system works so well that the private sector has embraced it as well. Mail list houses use it, as well as credit bureaus and financial directory publishers such as Standard & Poor’s, Dun & Bradstreet, TRW, Robert Morris Associates, and others.

For this report, and the “Economic Structure & Performance” sections in particular, the U.S. Census Bureau’s 1992, 1997, 2002 and 2007 Census of Service Industries were used. This detailed survey provided data about the value of adjustment and collections services’ annual receipts, number of facilities, payroll costs, top firms’ share of the market, and more---by size of the company and their facilities, for the total nation and for specific states and cities.

During the in-between Census years, most service industries’ receipts and growth rates are tracked by an annual publication of the Dept. of Commerce entitled: Service Annual Survey. Information is not nearly as detailed as the 5-year Census, and there are some problems with reconciling the data to the Census figures, but this survey does give one a more timely indication of industry growth. The latest S.A.S. is for 2010.

Marketdata finds it prudent to augment government figures with other sources of industry information such as: trade associations, business databases, annual reports and 10K statements of leading competitors, and in-depth telephone interviews, in order to obtain a more complete picture of the industry’s major issues, trends, and recent activity.

Nevertheless, the Census is useful in providing the industry with national and state “benchmarks” or characteristics of the companies operating. Consequently, credit bureaus and collections agencies may compare their operations to others of similar revenue or employment size.

Collections agencies were previously classified by the Government under the 3-digit SIC code: 732, and were further classified under 4-digit SIC code as follows...

7322 - Adjustment & collection services

However, the SIC system has been replaced with NAICS codes. The new NAICS codes are:

56144 - Collection agencies

Credit bureaus and collections agencies are defined by the government as an industry, as follows…

”Establishments primarily engaged in the collection or adjustment of claims, other than insurance. Establishments primarily engaged in providing credit card service with collection by a central agency are classified in Finance, Industry 6153; those providing insurance adjustment services are classified in Insurance, Industry 6411; and those providing debt counseling or adjustment services to individuals are classified in Industry 7299.”

Marketdata believes that it is dangerous to rely on just one source, and therefore uses a comprehensive variety of information sources in all its reports. The following sources were used for this study, and furnished a major portion of the total information collected.....

Original Marketdata Research* “Primary” research--phone surveys of top management at leading

collections agency firms, and consultants.* Interviews with trade associations and trade journals’ staff and editors, industry analysts, stock brokerage houses, affiliated research companies.

Individual Company Annual Reports, 10K & 10Q Statements, Product Literature, Brochures, Press Releases

Government Reports & Agencies* Administrative Office of the U.S. Courts* 1992, 1997, 2002, 2007 Census of Service Industries, U.S. Census Bureau* 1993-2010 Service Annual Surveys, U.S. Dept. of Commerce* U.S. Statistical Abstracts* Federal Reserve Board, Federal Reserve Bulletins* Federal Trade Commission* U.S. Department of the Treasury* IRS

Trade Associations & Staffs, Business & Research Groups* ACA International* American Bankers Association* Associated Credit Bureaus* Commercial Collection Agency Association* Debt Buyers Association* Mortgage Bankers Association of America* National Recovery and Collection Association

Trade Journals, Magazines, Newsletters - Their Editorial Staffs, Special Articles & Surveys* American Banker* Bankers Monthly* Business Credit* Collections and Credit Risk

* Credit Week* Credit World

Financial & Other Directories, Reports, Surveys* Info USA (national Yellow pages database)* Encyclopedia of American Industries* Dun & Bradstreet Corp., Business Starts Record, Business Failure Record* Hoover’s* Faulkner & Gray, Inc.* Kaulkin Ginsberg Company (various surveys and reports)* PriceWaterhouseCoopers special report for the ACA* Ernst & Young special report for the ACA* Robert Morris Associates, Annual statement Studies * Value Line Investment Survey* Ward’s Business Directory

Business & General Newspapers, Periodicals* American Demographics* Business Week* Banker’s Monthly* Barrons* Crains Chicago Business* The New York Times* Wall Street Journal

Business Databases & The Internet

FORECASTING METHODOLOGY

Forecasting the future direction of a market is never an exact science. However, past Marketdata projections have generally proven to be very accurate because of the comprehensive nature of our research. In formulating a forecast, we consider the following factors...

* Historical growth rate of the market--short and long-term* The size of the market, and how difficult it will be to maintain past growth rates off a larger sales base.* Supply (shortage/oversupply) of product or service, industry capacity levels relative to demand.* Price increases for product/service.* Number of new companies entering the industry.* The overall economic situation (recession or expansion period)* The strength of demand from critical end-user sectors.* Government/legislative impacts--new laws/bills/fines and their effects.

* The opinions of other analysts who track the market regularly (trade journal editors, brokerage firm analysts, other research firms).* Opinions obtained via telephone interviews of industry competitors, trade groups, analysts and consultants.

Only by considering all of these factors can one develop a truly "consensus" view of where a market or industry is headed, which proves time and again to be the most accurate forecasting barometer. Marketdata strives to obtain the best quality, most pertinent data only, from the widest possible array of sources that examine the industry from different viewpoints.

Purchasers of this study are encouraged to contact Marketdata with any corrections, additions, new sources of information, etc., which we will incorporate into future reprintings and updates of this study.