Sept./Oct. 2009

Debt Buying Returns to Its Roots

By Cindy Pickett

As industries go, debt buying is a new one. Most early debt buyers trace its foundation to the Resolution Trust Corporation. RTC, a government-owned asset management company, was charged with liquidating real estate assets, including mortgage loans that had been assets of insolvent savings and loan associations. According to the FDIC, between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion.

Fast forward to 2009. With the recent mortgage lending crisis, debt buying has gone back to its roots. A few names have been taken in vain for running up debt portfolio prices in 2008. The strong and experienced are braced for a return to normalcy. To learn more, we talked with John Lazarro, director of asset management for Hudson & Keyse, and two members of Asset Acquistion Group (AAG): Donna Meier, president, and Robert Rosales, business development manager.

Collection Advisor:  Tell us about your company and how you got to where you are today?

John Lazzaro: The Hudson & Keyse story is a great one about the entrepreneurial spirit of America. Joe Carroll started the company on his own 15 years ago. Shortly after, he hired a few collectors. Now we are a company of about 140 people and a legal network covering all 50 states. We recently completed the transition from a single entrepreneurial management structure to a corporate management structure.

Donna Meier: In 1990, I came into this industry by accident. My background is in software design and computer networks, and I was asked to do a small project for a company that had purchased a few boxes of accounts from the RTC. As I was working on the project, I became fascinated with the industry. I got hooked, and as a result, AAG was founded in 1992.

Collection Advisor: What industry do you serve or specialize in?

John Lazzaro: At the moment, we are focusing on financial services.

Robert Rosales: We specialize in purchasing and collecting contract-based deficiency balances, such as consumer loans, auto deficiency, mortgage deficiency and student loans.

Collection Advisor: Why should a business want to hire your company as its collection service?

John Lazzaro: Debt collection is only one service of many we provide to the ARM industry. Our value to ARM industry participants emanates from our ability to create mutually beneficial solutions. Specifically, we provide the following:

• Debt sellers: We operate in a dynamic marketplace that requires new and creative approaches to achieve desired results. As a result, we work closely with financial institutions to create unique relationships that help them achieve their financial objectives while simultaneously mitigating brand risk as customer relationships move through the post charge-off collection cycle.

• Debt buyers: We work with debt buyers of all sizes to create win-win opportunities for both companies. We are flexible in structuring relationships, encompassing but not limited to, purchase partnerships, complimentary purchases and purchases on behalf of other entities.

Robert Rosales: From a purchasing point of view, AAG is an ideal partner for banks and finance companies. Not only do we create immediate relief to the seller's bottom line, but we also preserve the integrity of the seller's brand name by working the portfolio internally over time.

Collection Advisor:  What are your thoughts on the current debt buying climate?

John Lazzaro: The current climate is unique in that there has been a massive devaluation of wealth. Combined with abnormally high unemployment and underemployment, we are seeing a shift in debtor profiles. We are seeing more affluent consumers who we believe have a much greater willingness to correct their situations over time.

Our long-term view is that liquidations will improve in 18 to 24 months, but in the short term, economic conditions will continue to result in flat to higher supply, which will put downward pressure on market prices. Offsetting supply-driven price pressure is increased demand for new money coming into the market as a result of a wealth transfer that has been underway as investors have abandoned equities.

In summary, I expect prices to remain relatively flat for the next 6 to 12 months.

Robert Rosales: The current market is inconsistent. Many direct issuers and finance companies are opting for a more aggressive internal collection approach prior to selling. The overall collectability of debt portfolios will change as a result, and pricing will continue to fluctuate downward until stabilizing.

Collection Advisor: The collection world continually changes. Are you compelled to alter your approach to the business as a result?

John Lazzaro: No and yes. The core of what we do — providing solutions to sellers, buyers and consumers — will not change. The way we deliver the solutions is changing.

Robert Rosales: A big part of success in this industry depends on your ability to adapt as economic conditions change. Whether you are adapting your collection model to meet the needs of today's consumers or are altering your litigation model to stay ahead of the ever-changing compliance landscape, adapting is crucial.

Collection Advisor: What is your outlook for the debt buying industry over the next few years?

John Lazzaro: Abundant supply will remain available, and prices will continue to be flat. The economy will start improving early- to mid-2010, but the debt hangover will extend any recovery as consumers allocate a greater proportion of disposable income to paying debt and saving for future unexpected market convulsions. Also, I believe new debtor-friendly laws will be passed, which will increase the cost of collection and adversely affect liquidation rates.

Robert Rosales: I think the resale market will always be strong, specifically on the state-by-state and regional levels. The direct sale market will rebound as well, albeit on a much smaller level. If revenues continue to decline, you will see more debt buyers moving away from the forward-flow product and focusing on bulk purchases until the market recovers. Regulatory compliance issues will continue to dominate the landscape, which will force many companies to alter their purchase and business models.

Collection Advisor: How important is technology to what you do?

John Lazzaro: Technology is very important and drives everything we do, from identifying specific segments to contacting consumers to managing inventory.

Donna Meier: Technology impacts every aspect of our business, from the due diligence and bidding processes to account prioritization and compliance during collection.

Collection Advisor:  Where do you see technology taking the collection industry?

John Lazzaro: The industry has yet to maximize the value of the Internet or fully understand its behavioral impact on certain consumer segments. Addressing these two items will certainly improve overall performance.

Donna Meier: I envision more electronic interaction with debtors via the Internet and self-service interfaces. Technology will continue to advance analytics and collection strategies for employing the best methods on a more targeted, per-account basis.

New state and federal regulations will need to reflect the trend toward fewer landlines in households. Cell phones are becoming the more ubiquitous telephone communication tool. Collection systems will need to integrate the various state regulatory limitations on contact frequency and the specific notifications required by each locale.

Collection Advisor:  What technological innovations would you like to see?

John Lazzaro: Innovation needs to focus on contacting and dealing with consumers in a manner they prefer. In addition to leveraging the Internet as a critical communication channel, I see mobility as a potential opportunity on the horizon.

Donna Meier: The tools necessary to accommodate all the items I mentioned above.

Collection Advisor:  How do you and your company give back to the community?

John Lazzaro: We support the United Way of Lake County, OH, and Junior Achievement by volunteering to help local residents and teaching schoolchildren about personal finance. Recently, we joined ARMing Heroes, a veteran support organization sponsored by the ARM industry. The goal of this organization is to provide job training, employment opportunities and financial counseling to veterans returning to civilian life.

Donna Meier: We focus on the needs of our staff and their families. We encourage our employees to be involved in their children's activities. We also encourage participation in community organizations and donate computer equipment to local schools and organizations that retrain individuals preparing to re-enter the workforce.