Credit card debt buying remains an active market as rising charge-offs create additional portfolios of delinquent accounts for sale to third-party debt collectors. Although buyers are paying less for charged-off credit card debt than they did several years ago, increasing supply and improved collection results could create opportunities for established participants in the market.
The industry itself has also changed significantly. Banks face greater responsibility for the debt they sell and the companies they choose to work with, while regulatory scrutiny has increased expectations surrounding documentation and collection practices. These changes have helped reshape a market once populated by many smaller and more aggressive debt buyers.
Long ago and far away, while in the credit policy group at First Union National Bank, I sold $1 billion in aged debt to investors for $12 million. There were no reps and warranties on the accounts. Accounts were the entrails from 35 different acquisitions completed on three different platforms. Ugly, ugly, ugly credit card paper, underwritten by failed banks; ratty incomplete notes. Missing contracts, no sales slips. Documentation was very low.
The debt buying market still has life in it, particularly as write-offs climb.
- Sales of bad card loans are climbing — while prices are falling — setting up some of the largest debt collectors for better times.
- Bidders now pay about 10 to 15 cents for every dollar of loans, according to a person with direct knowledge of the industry’s pricing.
- That’s down from 13.5 to 20 cents two years ago. Meanwhile, some collectors say they’re actually having more success coaxing borrowers to repay.
The market has changed. Low documentation loans on spreadsheets won’t (and shouldn’t) pass muster with the CFPB. Now, banks are accountable for what they sell, and to whom.
- There’s no sign that mounting write-offs will abate soon. Analysts expect the nation’s five largest credit card issuers — JPMorgan Chase, Citigroup, Capital One, Bank of America and Synchrony Financial — to write off $29.4 billion in debt this year, up 8.8 percent from last year.
The debt buying market is still active. Big players such as Encore Capital, with [NASDAQ ECPG] achieve revenue north of $1 billion.
- After the 2008 financial crisis, many smaller players entered the market and were too aggressive, hounding borrowers relentlessly.
- The scene made headlines, prompted stiffer regulation and turned some millennials off credit cards altogether.
- Now banks typically limit who can bid, and make them sign contracts blocking resales of debts to less savory players.
The big secret in the debt buying business is the statute of limitations. Consumers rarely realize that if their debt is 4 years old in California, or 3 years old in Delaware, the debt is typically deemed uncollectable and “outlawed”.
But, with the anticipated delinquency bump, there will be no shortage of inventory.
The credit card debt buying market is likely to remain active as major issuers continue to write off billions of dollars in delinquent balances. Falling portfolio prices could benefit well-capitalized debt buyers that have the compliance infrastructure and collection capabilities necessary to operate within a more closely regulated environment.
At the same time, buyers must consider factors such as account documentation, collection history, and statutes of limitations when evaluating portfolios. For banks, greater oversight of purchasers and restrictions on subsequent resales add another layer of responsibility to the process. As credit card delinquencies and charge-offs increase, the availability of debt for sale should provide established buyers with continued opportunities.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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