Introduction to the Loan Buyers Group
Crescent Bay Financial, LLC formed the Loan Buyers Group, LLC (LBG) to allow smaller Debt Buyers (Group Members) to join forces and purchase charged-off consumer debt at discounted prices. The program was designed specifically to meet the needs of the smaller Debt Buyers. Individual Debt Buyers, when working together, produce a bigger footprint and can jointly purchase and collect much larger files than most Debt Buyers could acquire alone. In effect, the concept of the LBG is to buy at wholesale, and share the savings with the Group Members.
The Loan Buyers Group membership offers far more than a group buying experience. It includes provides a comprehensive full service management program. Utilizing a set of proprietary tools, the LBG analyzes national Portfolios and determines the projected recovery rates for specific future time frames. This is accomplished by evaluating characteristics of a Portfolio, and then comparing those characteristics to similar portfolios where the recovery rates are known. The analysis includes future recovery projections, future resale values and provides the baseline guidance for determining the present value of the Portfolio. In essence, once we know how the Portfolio should perform, we can determine how much we can pay.
Debt Buyers purchase defaults with the intent to collect the outstanding balance. Buyers of charged-off debt either collect the accounts in-house, or they are outsourced to third party collectors. Collection fees are generally on a contingency basis and vary from about 30% to 50%, depending of the age of paper being worked and previous collection placements. The amount recovered through collections from the Portfolio, less collection and management costs, plus the resale value, will determine the profitability of any Portfolio.
Debt Buying - Background
During the 1990’s, creditors began to sell their bad debt outright to firms, and this market has grown dramatically over time. By 2005, $88 billion of credit card debt was sold in the U.S. with the 10 largest organizations accounting for the majority of debt purchased, and Debt Buyers holding about $170 billion (face value) in uncollected credit card debt that was less than 5 years old. By the middle of 2010, collection firms were actively seeking recoveries on over $250 billion in credit card debt. The banks charged off over $83 billion of credit card debt in 2009 alone, and the numbers for 2010 were similar. With these record charge-off rates at the leading banks, more debt is being sold, which kept prices relatively low through the first half of 2010. In the summer of 2010, pricing began to steadily increase for fresh charged-off debt and at the half way mark in 2011 prices for most types of debt have increased. The plus side to the price increase is the improvement almost across the board in collections of the accounts and the resale value realized on older accounts purchased in 2009 and 2010. The sluggish economy is still a challenge as is the high jobless rate, but many companies including all the public debt buyers, posted their best earnings ever for the 4th quarter of 2010, and again in the first quarter of 2011, and then posted even better in the second quarter of 2011. But, even with rising pricing, the low prices paid to initially purchase the debt, allows debt owners to settle for greatly reduced amounts, and provide more flexible terms for the consumers, than the banks will generally offer. This is one industry that truly thrives in a bad economy.
Why We Started the Loan Buyers Group
Over the past several years, we have talked to hundreds of people about their experiences with buying packages of charged-off consumer debt. Many had purchased small State packages with very few accounts, had participated in other buying ventures where they were being charged high monthly fees or had purchased portfolios at retail prices, and we discovered that only a small handful had actually recovered their initial Portfolio investment. None of the buyers we have spoken to had experienced returns which were anywhere close to their expectations. Our own research indicated that there were a number of reasons for the low performance on these Portfolios.
Common Problems Experienced by Individual Debt Buyers
- Paid too much for the debt
- Had few choices of sellers
- Bought the wrong kind of debt
- Bought a random split of a National file and had no buyers interested in purchasing their accounts after they were finished with collections
- Didn’t have enough size to get attention from the collector
- Only wanted to pay the minimal amount for collections
- Had unrealistic expectations about the performance of the file
- Had little knowledge of how the file should actually perform
- Paid too much in fees, coaching and support
- Had too small of a file to sell profitably
- They were working with outdated and incomplete information
- Relied on a Broker or Resellers opinion of how a debt should perform
- Didn’t have the time or skills to manage the collection process
In short, new buyers were inexperienced and naive about the business and most didn’t have the time to learn or the management and analytical background required to perform well in this industry, yet were interested in participating. After identifying many of the challenges facing the individual Debt Buyers, we determined that there was a need for an entity that could locate promising portfolios and provide proper management and reporting for the collections. We also took it upon ourselves to really look under the veil, and uncover the realities of the Debt Buying business as it operates in the current economy. Because the economy and the debt buying business had changed so much in the last several years, we recognized that it was imperative to understand how different types of debt were actually collecting today, so we would not overpay for our inventory. And most importantly; we wanted to know how we could maximize our returns on the dollars invested, by purchasing and collecting the right types of bad debt.
The Founding Principals
We quickly recognized that to produce better results than the majority of the small Debt Buyers had achieved, we would have to invest in a different type of operation, acquire Portfolios differently and be of sufficient size to get the attention of the collectors working our accounts. We needed to develop systems to evaluate what we were buying and establish performance criteria for the collection of our Portfolios. We also needed to implement systems and procedures to report monthly collection activities to the Group Members, as well as sales, put-backs, bankruptcies and recalls and other information about the Portfolios that were purchased, so that each of the Loan Buyers Group Members were kept informed about the performance of each of the Portfolios they were a participant. We structured it from the very beginning to allow each Group Member to maintain complete confidentiality with their Membership in the Loan Buyers Group.
The Founding Principals of the Loan Buyers Group
a) Buy larger Portfolios to obtain a better price
b) Develop better access to the right sellers so that we could purchase the best Portfolios available
c) Buy the most collectable kind of accounts
d) Acquire large enough Portfolios to have the maximum flexibility for the resale of the accounts
e) Become larger ourselves to be important enough for the collection agencies to seriously work our accounts effectively
f) Develop a way to model our Portfolios and establish reasonable expectations for the collection of the accounts
g) Identify and engage the best collection agencies and maybe pay a little more for collections to get superior results and more attention
h) Have a way to measure our performance
i) Stay current on news, legislation and insider events
j) Stop wasting our money on unnecessary services and rely on our own research and analytical skills
k) Share the benefits of discount buying with other Group Members
Expand the Group to take advantage of larger opportunities
We evaluate many portfolios for the LBG
and most do not model well for us. It is only by screening a large
number of files from various issuers that we find the Portfolios that do model
very well and are candidates for purchase. With
average industry returns in the 30% range for the largest debt buyers,
we have found that we should improve on that by targeting higher than
average return files based on our modeling, thereby
providing a service for our Members that is unique to the industry. But
even just consistently reaching the return averages achieved by the
most sophisticated debt buyers who are very well capitalized is a significant achievement, compared to the investment alternatives generally available.
Joint Purchase of Charged-off Accounts
There are many benefits to buying larger Portfolios of consumer loans. We bid or negotiate only for the purchase of Portfolios that are projected to perform the best for the LBG Members. We are very selective in our search for new opportunities and only bring Portfolios to the attention of the Members, when the Portfolio meets certain minimum criteria. We are not Brokers and we do not have inventory that we bought and marked up, to sell to the Group Members.
Benefits of Joint Purchase and Collection for LBG Members
The methods that we pioneered allow the LBG Members to have a much bigger footprint during the collection process. When the LBG brings thousands of accounts to the collector, we get far more attention, and a higher priority because of the size of our accounts. We may pay a little more for collections than a smaller buyer, because we want the best collectors in the agency working our accounts and we want the best agencies working on our behalf. These components when combined, give the Loan Buyers Group an edge in this highly competitive debt collection business. Buying the files for the right price and having the collectors highly motivated to perform on our accounts, provides the structure that we need, to achieve our objectives.
is greater buying power as a Group and collectively the LBG can
purchase a Portfolio of a larger size, at a national level, from vendors
and issuers who are just not available to small individual buyers.
- The Portfolios can be purchased
much less expensively, by buying closer to the source, with fewer hands
touching the file we can also avoid much of the adverse selection and
markup of the Portfolio by brokers and Resellers.
- We are able to partner with some of the world’s largest debt buyers and
jointly purchase Portfolios and share the accounts at a lower cost
- By buying in smaller amounts across a number of different Portfolios, we
can maintain diversification, thereby reducing our risk by being too
heavily invested, in a poor performing Portfolio.
- By keeping the accounts together in collections, we have a bigger
presence and get more attention from the collectors, and we protect the
integrity of the original Portfolio, giving us more options, and
generally receive higher pricing on the resale of the accounts.
- Economies of scale when handling put backs, media requests, direct pays, contracts and other post purchase and sale support
- Sharing returns on a greater number and diversity of accounts, thereby increasing our chances for the “home run” settlements
- Avoiding the hassle of having to manage a handful of accounts, across
multiple states, which occur with a random split of a National file.
- No monthly fees or membership fees are charged for LBG Membership
Each portfolio acquired by the Loan Buyers Group is kept together for collections, with the Loan Buyer Group Members sharing the revenues, based on their ownership percentage of the overall Portfolio. The alternative would be to split up a file between the members and have them collect their own accounts. We do not operate in that manner for a variety of good reasons. For example, if a portfolio were initially split up, say a $100,000 file split equally between 10 people; each $10,000 portion of the file will not perform exactly like another. A few will be very good, a few very will be poor, and the rest will be somewhere between. The intent of the Loan Buyers Group concept is to balance out the risks associated with the highs and the lows of any given portfolio, for all the participating Group Members, so everyone has have an equal share of the returns, given an equal purchase amount.
Loan Buyers Group - Commercial Division
If a member is interested in obtaining separate files to work independently, they are directed to the LBG Commercial Division where a Portfolio can be split proportionally, based on the dollar amount invested by each Member. This is accomplished by using a total random split sequence, performed utilizing an algorithm, that has been developed entirely for this purpose. This process balances each Member’s individual Portfolio, taking into account (average balances, last pays, states etc.). State level purchases are occasionally available for the Commercial Division Members who are generally Collection Agencies, Collection Attorneys or larger Debt Buyers who have their own collection networks established.
Loan Buyers Group – Business Model
The Loan Buyers Group focuses primarily on buying credit card debt, but for the sake of diversification, we have on occasion looked at student loans and several types of bank overdraft accounts. We do not purchase payday loans, auto deficiencies, telecom, jewelry store accounts, medical accounts or health club memberships. We have solid recovery data on many types of debt, but since the credit card accounts represent about 80% of the entire business, it only makes sense to focus on the bread and butter products and stay away from the exotics, where less reliable data is available and recovery rates are generally exaggerated. In choosing the accounts for purchase we generally focus on Prime Credit Card from the top 10 banks, and occasionally find some direct from the issuer, Private Label Cards.
The Business Model for the Debt Purchase and Collection Industry is Simple
- Locate accounts available for purchase and model the recovery rates
- Buy only accounts that meet the predefined criteria for the right price
- Collect the accounts purchased utilizing carefully screened 3rd party agencie
- Manage the collections, track the performance, distribute the monthly revenues and move eligible accounts into the legal strategy
- Sell uncollected portfolio balances at the optimal times to maximize returns
- Repeate the process
Our goal is to perform consistently with our targeted projections, buy at the right price, professionally manage our collections, closely monitor our results and resell the portfolios at the right time.
Our evaluation model is based on a proprietary data set which uses actual recovery information over a long period of time for different types of assets. We are routinely updating the model to reflect current market conditions. Since a national file is heavily weighted by the larger states, the portfolio is subject to regional unemployment and economic differences which have a great impact on the current value of a file. The positive side of examining a National file is that we can compare recovery projections against a much larger data sample, and we are less likely to have any data outliers having much meaningful impact on the results. The Issuers generally only sell national files, so there is much less of a concern for adverse selection within the file that may skew the results. In this economy, we also like to buy portfolios directly from the issuers that are a little older, and may have been worked by the issuer for a collection cycle after charge-off. We do not use a scoring model, which is most commonly used to determine returns by Debt Buyers. A scoring model will give you an idea of which accounts are likely to pay first. The recovery model is a statistical model which shows how much should be recovered from the entire portfolio at determined time frames.
The Four Basic Performance Components
1) The Acquisition Price of the File
2) The Collection Cost including Management Fees
3) The Recovery Rate or Liquidation Rate
4) The Resale Value of the Uncollected Accounts
Portfolios modeled that meet our criteria are presented to the Members for review. After assessing the data generated from the recovery analysis model, each Group Member will make their individual decision on whether to participate or not in any particular Portfolio. The modeling provides the Members not only with guidance on the purchase price for any given Portfolio, but projected cash flows from collections are calculated and displayed in the initial Portfolio Report as well. These initial recovery estimates are also used to track the performance of the Portfolio after purchase.
Collections and Management
Once acquired, the Portfolios are held together for the Group Members during the collection process. All Portfolios are managed by the Portfolio Manager who oversees the collections process, as well as managing the put-backs, media requests, settlements and direct pays.
Typically, the files placed within the LBG Collection Agency network, are worked through a traditional call center model. The accounts are initially scrubbed for put-backs, skip traced, introduction letters are sent, and collection calls are made seeking settlements or payment plans. The agencies work on a contingency basis and are paid based on the amounts collected. Fees vary depending on the type and age of the accounts. The agencies remit the collected amounts monthly, which are then distributed to the Group Members who are participating in the Portfolio.
The LBG has contacts with many large sellers that have been developed over time and has access to Portfolios that are not available to the smaller Debt Buyers. Many sellers have sought us out because of the high profile we have developed through the publication of our Newsletter (Crescent Bay Financial – News & Views), and they make inventory available to us regularly. Operationally, the LBG has many effective systems currently in place for the acquisition, modeling, management, collection and reporting for typical consumer collections utilizing a call center approach. We also identify accounts within the Portfolios, which would be eligible for pursuing a legal collections strategy.
We keep abreast of the new regulations being adopted and others pending which regularly challenge the collections industry. We must continually adopt new methods to reach the consumers which are compliant with the amended laws, insist on complete account level documentation from the sellers, and continue to demand collector level accountability for every single contact they have with the consumer. We only work with reputable Collection Agencies that follow the law and treat consumers with respect.
The Membership Process
The collective purchase of goods is not a new concept. There are countless examples of enterprises where people come together and buy products for their own use collectively, and share in the discounts and benefits of buying in quantity. If you choose to participate in the Loan Buyers Group, you will be managing your own investments and making your own investment decisions. Crescent Bay Financial, LLC, Loan Buyers Group, LLC, CBF Asset Management and the LBG Portfolio Manager are acting, only as consultants. We are not managing your money and we are not soliciting any investment from you.
By joining the Loan Buyers Group, you are acknowledging that you understand the risks and uncertainties of collecting charged-off debt, and recognize that any forecasts, recovery models or estimates of any Portfolios projected performance, is not a guarantee of actual results. The best practices shall be utilized to collect these accounts, but the LBG, the LBG Portfolio Manager, and any agents, collection agencies or attorneys employed by the LBG Portfolio Manager may be unsuccessful in collecting from any accounts purchased by the Loan Buyers Group.
LBG Members have the ability to recall their individual accounts under management pursuit to the early withdraw provisions as outlined in Loan Buyers Group Membership Agreement. This process allows LBG Members to withdraw their accounts for independent collection or sale. Each Group Member recognizes that The LBG was formed, to collectively work with the entire Group Membership in the acquisition, collection and sale of an entire Portfolio. The LBG Manager may assist a Member who wishes to withdraw, with the express understanding that such assistance will not cause a negative impact for the rest of the Group Members or create a situation where any single Group Member, receives an unfair benefit from a sale or early withdraw, which is not enjoyed by all Group Members equally, based on their ownership interest in the Portfolio.
The minimum investment size for each Portfolio purchase is $5,000 and the average purchase size is generally $10,000 to $20,000 for each Group Member. We strongly believe in diversification for all members in the Loan Buyers Group. If a Group Member has $15,000 available for Portfolio purchases, it is our general recommendation that the Group Member considers placing $5,000 in three different portfolios, and not places the entire investment just into one portfolio. All of the portfolios are different and being diversified helps balance out the Group Member’s risk associated with the Portfolios.
Every aspect of the Loan Buyers Group process is confidential. The LBG will not share any Member information with any party, and the mailing list is confidential and never distributed. Upon joining the LBG a membership identification number will be issued to the new Group Member which is used in the monthly Portfolio reporting.
The Loan Buyer Group Membership Materials
- The Loan Buyers Group Membership Application and Contract
- Mutual Non-Compete Confidentiality Agreement and Non-Disclose Agreement
- Disclosure Document
- Loan Buyer Group Membership Information Form
There are no membership fees to join to join the Loan Buyers Group and there are no monthly membership fees. Every other week on Wednesday at 5:00 Pacific time, we host a conference call, which is only open to Group Members. In the call we review the current status of Portfolios, examine new opportunities and discuss current trends and the general state of the industry. We also record the calls and send the recording to all Group Members.
For additional information contact:
Gary M. Baker – Portfolio Manager: Loan Buyers Group, LLC
(949) 499-8010 Fax (949) 499-4169 e-mail: firstname.lastname@example.org
668 North Coast Highway - Suite 1230, Laguna Beach, California 92651