In the USA, there is a growing number of companies, attorneys and
associations who are best described as "debt buyers." Typically one of
these entities will buy a portfolio of thousands of consumer accounts
for pennies on the dollar. These accounts are usually charged-off
consumer credit card accounts where the customer has stopped making
payments for at least six months and is no longer at the last-known
address.

These consumers are typically found by the new owner of the account
who seeks payment in full on the principal amount plus allowable
interest accrued under state and federal law.

If these accounts are collected, there must be statistics stating how
much revenue is recovered and on what basis. It could be assumed that
the older the account is, the more difficult it would be to collect.
As stated above, however, this is a growing industry in the USA and
entities must be finding some measure success in this venture.
 
My question is:

What is the recovery rate by US Debt Buyers of charged-off credit card
debt and how is it calculated? Eg. If there is total number of 1000
accounts to collect, each with an outstanding balance of $5000, how much is
collected and how does the aging of the account affect that recovery
rate? Substantiate the results.

---

Request for Question Clarification by pafalafa-ga on 18 Nov 2004 16:02 PST

cheler-ga,

There are a number of debt-recovery companies that are public
companies, and that report to shareholders (and to the SEC) detailed
statistics on their debt collection and recovery rates.

There's a great deal of detail in these reports, although not
necessarily laid out in exactly the fashion you asked about.

For instance, one such company is Portfolio Recovery Associates, and
you can see their 2003 annual report at:


http://media.corporate-ir.net/media_files/irol/13/135456/reports/PRAA-2003-ar.pdf


In it, they report (among other things):

--collect 2.5 to 3 times the amount paid for a portfolio

--25% collected in year 1, 25% in year 2, 20% in year three, then
diminishing returns in years 4-7

--mixed debt:  credit cards, student loans, utility accounts, etc. but
dominated by credit cards.  For instance, PRA reported $4.1 billion in
face-value Visa-MC-Discover card debt, as compared to $1.7 billion in
the next biggest category, "consumer finance".



--average purchase is 2.77% , which I assume means 2.77 cents on the
dollar (rate varies from 0.31% to 11.0%)

============

Like I said, there's a lot of additional information in the reports as well.  

I am aware of several other companies in the debt-collection business
that also file public reports.  Do you think these would provide you
with useful information even if (as seems to be the case) they don't
provide the precise types of breakouts you asked about?

Let me know your thoughts on this.

pafalafa-ga.

---

Clarification of Question by cheler-ga on 22 Nov 2004 08:16 PST

Thank you for your initial response.
I need an answer to the question as written: What is the recovery rate
by US Debt Buyers of charged-off credit card debt and how is it
calculated?

The information required relates only to credit card debt and only to
accounts charged-off and purchased by a third party debt-buyer. There
is industry practice that sets out first, second and third party
agency placement indicating how many times collection has been
attempted prior to sale. I am aware of purchase pricing of such
accounts and understand the expected percent per annum revenue curve -
what I need to know is the expected post-sale rate of recovery for the
US credit card account debt-buying industry only, especially in the
"sub-prime" category.

Hope this helps.

cheler-ga,
As an introduction let me make clear that my personal experience
relating to credit card collection is in the Australian economy. In a
way this is a simplified, but still comparable scenario, to the
specific question asked.

First of all (like America) we have the credit providers; Banks,
Credit Unions (U.S. equivalent of Savings & Loans) & businesses who?s
main focus is on the provision of goods (but are still allowed to
provide credit cards). Guidelines for credit provision have an
elemental regulatory framework (under the Federal Law and guidelines
of our Reserve Bank), with complementing input from the card providers
(i.e. Mastercard, Visa & yes American Express) with the bulk made up
by the ?providers? concerned.

As in any economy, credit is provided under the three C?s of Cashflow,
Collateral & Character. The applicability of each of these vary,
depending on the individual policies of the organisation concerned and
of course ?collateral? is only a issue, in situations where corporate
cards are being talked about.

On the flip side (where your question starts to come in) the ?issuers?
have varying levels of delinquencies. These go through internal
processes until a point is reached when they are written off.
Collection on cards has over recent years been increasingly regulated,
making this process more difficult, but as in the American system a
persons credit history will follow them around.  This remains the ?big
stick? for borrowers on the wrong side of the rails.

When there is a write off, it is standard practice to sell the debt in
?books? to receivable management companies (nice way of saying debt
collectors) for (as you so aptly say ?pennies in the dollar? with the
shortfall being a fully deductible tax item to the credit provider.

The ?receivables? then ask, coax and implore the borrowers into making
payment, any payment on the debt. They claim the full amount and
interest but are willing to settle for much less. Collection is rarely
(very) face-to-face, instead done through ?call centres? with the
facts clearly stated as to what the new owners of the debt intend to
do (i.e. ?start making payments?, ?come to an arrangement?, ?get a
court order?, ?credit history will be affected? etc). However
all-in-all except for a note being placed on the borrowers credit
history, very little actually happens to an affected individual (if
they can take the regular phone calls and letters that is).

Under Australian conditions nearly no information is publicised as to
card delinquency, write offs, payments made for debt books and
resultant recoveries. This is for the reason that an economy is based
on perception, not fact. Anything that brings into question that
perception is to be suppressed.

However as I have some little experience in the area of your question,
this is what I know.
Credit Providers:
Card Delinquency     				 18%
Written Off					  9%
Written Off (Cards issued to 
foreign nationals working in Australia)	         34%


Receivable Management Companies:
Price paid for ?books? is dependent/reflective of individual ?issuers?
policies concerning credit (there are both good and bad ?loan books?).
Price paid for a good book range between 3-6% range.

Rate of return: -1.5% to + .5%.
Explanation of such low returns (in the Australian Context) is that
?receivables? as an industry are a newer phenomenon than in the U.S..
We basically have three highly competitive companies in the business
(two who have been in existence for only a decade, having been formed
from large mergers of small collection agencies) who have priced their
bids for ?debt books? on not enough historical information against the
?providers? (Banks etc), who are highly experienced and very willing
to generate a few pennies on a very marginal profit centre, while
keeping in mind the immediate tax advantages.

As to aging of the debt, as far as the ?receivables? go it is again
dependant on the ?book? they have purchased. For a good book 80-90%,
can be discarded after an initial attempt at recovery (finding an
individual debtor is the first of many hurdle). The balance is made up
of a ?one of settlement? amount, those to be pestered (with an
occasional amount received) and regular payers. In the end a book life
is no more than three years.

Finally as this is comment (reliant on personal knowledge) I don?t
have to substantiate anything. But I mean that in a nice way OK (as I
have alluded to; the fact is that information regarding ?prices paid
for? and ?returns received? just don?t appear on publicly released
records.

Hoping this has been of some little assistance (and happy to clarify
any areas I have been unclear on).


gfmaster

cheler,
Still researching your question and will respond more fully latter.

You may be interested in the following links:
Standard Industry Terms see here:
http://www.debtbuyers.com/indus_terms.php3
Industry information see here:
http://www.collectionssource1.com
note that they have a demo model that gives us a insight of size of
market & how it works (with figures to at least 2002) see here:
http://www.collectionssource1.com/demo/

Kind regards,
gfmaster

cheler,
Commenting on your specific question the most apt answer (after
extensive research) is the following quote:

?Question:  What kind of a return can I expect to make?
Answer:  Who knows? Let your own experience be your guide. If someone
tells you what you what kind of dollars you can expect to make on any
given package, or even in general, we suggest you "turn tail and run".
Your experience will depend on the quality of your operation, as well
as the quality of the accounts. As one friend said, "if you buy these
accounts and then go sit on sailboat, you probably won?t do very
well".?
Clearinghouse for debt Frequently Asked Question 
http://www.chargeoffclearinghouse.com/frameset_chargeoffclearinghouse.htm

Failing this a useful article (1) states that ?$166.7 billion in
charged-off credit card debt was made available for purchase by
collection agencies and debt buyers in 2003? (2), from this ?$1.2
billion? in revenue was generated giving a percentage return of .72%.

Commentors Notes:
(1) http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/collect.html
(2) ?Debt Sales Still Rising?, The Nilson Report, Issue 806, March
2004, http://www.nilsonreport.com/issues/2004/806.htm
(3) (believed by commenter to be sourced from) ?Benchmarking 2003?,
The Kaulkin Report,
http://www.kaulkin.com/publications/benchmarking/benchmarking03.cfm)

As this response falls short of your stated criteria, I wish to state
that the official statistics of charged off credit cards do not
distinguish between subprime and others, with the various governmental
bodies involved having differing publishing guidelines, that clouds
the areas further, as shown here:
Measuring Credit Card Industry Chargeoffs: A Review of Sources and
Methods, Mark J. Furletti, Federal Reserve Bank of Philadelphia,
September 2003.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=572586

Page 1. ?The following organizations publish industry chargeoff
statistics: the Federal Reserve Board (4), the Federal Deposit
Insurance Corporation (5), the Federal Financial Institutions
Examination Council (6), Fitch Ratings (7),?.Thompson Financial (8),
and CardWeb.com (9)?

Commenter Notes:
Document characterises/classifies the official statistics (of credit
card charge offs) that can be found here:
(4) The Board of Governors of the Federal Reserve System (BOG).
http://www.federalreserve.gov/releases/chargeoff/ 
(5) FDIC
http://www2.fdic.gov/qbp/
(6) FFIEC 
http://www.ffiec.gov/ 
under Quick Links/ Uniform Bank Performance Report (UBPR)/All UBPR
Statistical Reports/Peer Group Data Reports/Peer Groups 201,202,203.
(7) Subscription Service under title Credit Card Movers & Shakers.
http://www.fitchratings.com/
(8) Thompson Financial is a subsidiary of Thompson Media who own the
site ?Credit & Collections World? (as advised in post of 22 Nov 2004,
22:19PST).
http://www.collectionssource1.com/
 (9) Consumer Service with subscription service.
http://cardweb.com/

Also it is of relevance that parties involved in debt buying are
basing their expenditure primarily on experience, either on personal
experience with a given seller, or on historical experience in the
form of debt models (credit scoring), as shown here:
Journal of Business & Behavioral Science, Volume 8 No.1, Fall 2001.
Page 32, A Credit Scoring Model for Subprime Debt, Angeline M. Lavin,
University of South Dakota
http://www.asbbs.org/files/JBBS_Vol8_2001.pdf

Page33. ?Despite the widespread use of statistical techniques in the
consumer credit industry, the published literature on credit scoring
is sparse. The lack of published work in this area can likely be
attributed to the nature of the lending industry. First, superior
credit scoring techniques provide lenders with a competitive
advantage. Therefore, lenders are unlikely to divulge their methods.
Second, confidentiality of applicant information must be maintained ?.
Finally, the majority of all consumer credit scorecards are
proprietary products developed by Fair Isaac (10) or Experian (11) and
sold to lenders worldwide?

Commenter Notes: 
Document provides an insight into scoring methodology (primarily
directed at subprime lenders, but equally applicable to debt buyers
(if they adhere to this style of approach)).
(10) Fair, Isaacs & Company see here: 
http://www.fairisaac.com/fairisaac 
debt buyers section see here:
http://www.fairisaac.com/Fairisaac/Solutions/Solutions+by+Function/Collections+and+Recovery+Solutions/Enterprise+App_Collections_and_Recovery+Solutions.htm
(11) Experian see here:
http://www.experian.com/
debt buyers section see here:
http://www.experian.com/credit_solutions/collections/index.html

Given the restrictions on the data as stated (also due to
?subscription services? being a feature, of the commercial side of
things) I am unable to provide further detail, other than based on my
original comments (personal experience) that do not relate directly to
the U.S. system.
 
Articles of Interest:
http://www.edcombs.com/CM/News/News268.asp
http://finance.ba.ttu.edu/bauguess/110304_ignored%20consumer%20debt.htm
http://www.debtmarketplace.com/industry-associations.html
http://www.collectionindustry.com/leaders/panels/debt_purchasing.cfm

Kind regards,
gfmaster