Most commercial lenders live in a different world than the financial service sector that deals with the last shreds of their handiwork: debt collectors. On the commercial side, it’s called “workout” or “special assets,” which describe the efforts to collect problem loans through patience and negotiations, or when necessary, foreclosure, lawsuits and bankruptcy court.
Having spent some career-satisfying years in workout myself, I maintain that in commercial lending, it’s still button-down work with a definite professional air to it. But the diabolical opposite can be said for consumer debt collectors, who usually live on another planet.
While I will generously allow that there must be (hopefully) thousands of exceptions, the consumer debt collection business is largely occupied by an assortment of people ranging from ill-tempered, chip-on-the shoulder types all the way to ex-cons, fraudsters and thieves.
The New York Times Magazine recently featured a compelling story about a former blue-blooded hedge fund manager who took the plunge into this business of buying and selling ‘books’ of paper. ‘Paper’ is the term used for account portfolios delivered on spreadsheets with no supporting files, no documents, no proof of obligation, but just names, phone numbers and alleged sums due.
If you already think this business is slimy, prepare yourself for a stunning narrative of an industry bordering on organized crime.
The article describes a dizzying array of variables affects a portfolio of debt’s true potential — the age of the debt, how many agencies have tried to collect on it, the size of the balances, the type of credit card, where the debtors live and the current economic climate. These variables decided whether the portfolios are sold for nickels or pennies.
What’s more, recognize that there’s no single market or venue — like the Nasdaq or the New York Stock Exchange — where this kind of debt is sold. This creates a marketplace that is inherently inefficient, and ripe for exploitation. And buyers frequently learned that the same portfolios get sold more than once.
It’s a good read and eye-opening expose that should be examined by more of the banks and creditors who wholesale their uncollected accounts. The abuse that is rife in this sector will sooner or later draw more scrutiny and regulation, and we know who will pay for that.