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Credit Collections and Risk: What Should Be On a Debt Seller’s Checklist?
Published on 01/08/2011

We have all heard the proverbial question – which came first, the chicken or the egg? While that might be considered an age-old conundrum without a clear answer (depending on who you ask!), the same cannot be said for the debt purchase industry’s equivalent: which comes first, complete creditor data or a good, sustainable purchaser price? We have often been asked by creditors to clarify what data we require in order to accurately analyse a portfolio and, by extension, offer an appealing price for the assets under consideration.

In our view, the answer to this frequent query is actually quite simple: transparency on the part of the seller will always help buyers to propose the best possible price. The reason for this is straightforward – if an important data field is missing, for the sake of prudence the buyer must assume that the file is negatively attributed on that metric. For example, if last payment data is not provided during the pre-sale analysis phase, or where this information is not populated for the majority of cases, the buyer must effectively assume that a customer has never made a payment. It is not surprising that such an assessment serves to lower the price of assets.

It is worth mentioning at the outset that, to a large extent, any data provided by the creditor prior to sale must be analysed by the buyer in something of a bubble. This is because debt purchasers are not permitted to access customers’ credit files until after sale and assignment have taken place. Pre-purchase credit file access is not permitted under the SCOR principles of reciprocity guidelines. Buyers must therefore employ detailed and complex analytics to assess the projected underlying value within any given portfolio. It is an inherently time-consuming, and potentially sale-delaying, process to attempt to compose a complete picture of each account in question from an incomplete data set. Up-front data provision on the part of the seller serves to mitigate these potential pitfalls.

Be specific
Now for some crucial specifics. The following is our own version of a ‘how to’ checklist for sellers, which is based on our experience. During the sale process, it is extremely useful if sellers provide a very comprehensive data file, including:

  • Customer details – such as name, address and date of birth.
  • Account details – balance, open date, default date, default balance and, if the customer is in an arrangement, when it was set up, the frequency, the agreed amount and any advice agency.
  • Payment history – where possible, it is useful to receive a transaction file for the life of the account, rather than from the point of entry into recoveries. Even for non-paying files, it is very helpful to get a sense of how customers were paying prior to delinquency. If it is not possible to provide a transaction file, last payment date and amount paid are critical and should always be provided to avoid negative assessment.
  • Product information.
  • Placement history – if applicable, it is advisable to outline where, when and with whom the account has been externally placed. Likewise, information regarding whether the account has been through a litigation scan or actual litigation processes is very important.

Sellers should review the file and validate data integrity before distribution to potential purchasers. This includes checking the file for any obvious data issues, such as missing values or obviously incorrect information. For example, 1 January 1900 is probably the single most common date of birth we see in bid files!

Ease of interpretation
It is critical that data is easy for purchasers to interpret – a data dictionary is always welcome. This information is particularly useful when there are terms in the bid file whose meaning may not be entirely obvious to an external party. Common examples include internal recoveries terms or product codes.

Finally, purchasers require any additional available information necessary to make an informed decision. For example, where possible it is very helpful if a seller is able to supply a debt sale briefing pack detailing the background to the sale, including:

  • The sale process and timelines, including the determination date for the file.
  • How the file has been selected, and any exclusion or inclusion criteria that have been applied to select the particular pool of accounts.
  • The collections and recoveries processes used on the accounts to date. For example, information regarding settlement thresholds at different collection stages and details of any litigation activity are particularly informative.
  • Batch liquidation rates from previous sales or comparable external placements are also useful.
  • Any other information the seller deems relevant, including, for example, whether a portfolio is to remain in situ at the current servicers – something that we are very happy to agree to.

Conclusion
Providing a complete data set to potential buyers during the sale process has myriad potential benefits for all involved. The checklist provided above may seem resource intensive, but each individual element is critical to ensuring a smooth overall process and alignment of interests both pre- and post-sale, as well as, critically, facilitating the best possible outcome for the customer. Complete data helps to ensure compliance before, during and after purchase, and helps to minimise any potential problems or noise. We feel the answer to the debt purchase industry’s chicken or egg question is quite clear: in short, transparency is critical. In our eyes, comprehensive data, provided up front by the seller for analysis during the sale process, is the key to ensuring all parties obtain the level of comfort required to agree the best possible servicing solution and price for the assets in question. Together, we can all help to ensure that the mechanics of debt sale result in a positive sustainable outcome for all, whether seller, buyer or customer.

Andrew Birkwood is the chief investment officer for Arrow Global.

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Arrow Global Limited is registered in England and Wales with company number 05606545. Its registered office is at Belvedere, 12 Booth Street, Manchester M2 4AW. Arrow Global Limited ("AGL") is authorised and regulated by the Financial Conduct Authority for certain credit-related regulated activities, and is part of the Arrow Global Group. AGL is registered on the Financial Services Register under registration number 718754.