The state of the consumer accounts receivable industry

Karen Bubrowski : 0:08

Hello, and welcome to the Hilco Global Smarter Perspectives Podcast Series. I’m your host, Karen Bubrowski. Today, I have the pleasure of having Jay Stone and Buddy Beaman from Hilco Receivables with me today to discuss the current state of the consumer accounts receivable industry. Hi, guys! I hope you’re both doing well in this extraordinary time. I appreciate taking time out of your schedule to be with us today. So to start, why don’t you kick it off by telling us some of the history of the ARM industry and where do you see it headed?

Jay Stone : 0:46

I think to understand where we are today, based upon what’s happened with the COVID crisis, we need to take a step back in the ARM industry. Back to 2008 and 2009. That was the last great correction that we saw in the consumer space. When I speak about consumer paper, we’re talking about credit cards, we’re talking about installment loans, we’re talking about auto paper, we’re talking about student loan paper. 2008 and 2009 was a very dark time for the consumer space. And it was brought about by the collapse of the housing market in the United States. What Buddy and I saw there were charge-offs that went up well above what historically portfolios had been charging off at. So in the credit card industry, which was probably less than a trillion dollars at that time of outstanding debt, you had an auto industry, which was under a trillion dollars, you had a student loan industry, which was probably three quarters of what it is today. You saw significant charge-offs brought about by reduction in consumer spending, as well as unemployment. So, in ’08 and ’09 portfolios like JP Morgan, their credit card portfolio, which historically had been charging off about three to three and a half percent on an annualized basis, they went up to well over 10%. You saw the same types of things at Sallie Mae, which was heavily involved in student loan business at that point. You certainly saw the same type of thing with performing home portfolios at Wells Fargo and some of the other large lenders. What’s kind of interesting is this crisis today was brought about by a very different black swan. This is obviously a pandemic. But Buddy, I’m interested to see how you look at this in terms of charge-offs, because I think that’s what a lot of banks are looking at today. Is there really a calculation or a template that you can use to see what creates charge-offs and how you can track that?

Buddy Beaman : 2:45

Yeah, you know, Jay, I think the biggest thing that we always kind of look for is the unemployment rate and how it relates and we’ve found that, you know, there’s some numbers that show that whenever the unemployment rate doubles, the charge-offs, go up about 70%. So, in theory, you know, the charge-off rate, the unemployment rate has gone significantly up during this COVID time. Now some of that’s going to rebound. Right? But the fallout is you could see charge-off rates going well above that 10%, maybe even as high as 13, 14, or 15, if these numbers hold true to when the market comes out of it. One thing that we’ve kind of noticed is, you know, during this time, a lot of banks and financial institutions are putting off payment plans and kind of mask delinquency rates a bit because they’re trying to keep your customers in a current state or, you know, above water. And I think the real impact is, you know, kind of towards the end of the year because of the way charge-offs work and the delinquency rates. In six months to nine months is really when we’ll feel the impact of people not rebounding from this economy.

Jay Stone : 3:56

Yeah. No, that’s interesting and you and I have had this discussion at nauseum, right? I mean, we talked about this last year in 2019, we were very concerned about what was going to happen in the consumer market going into 2020. I mean, you’ve said it to me a million times before credit cards above a trillion dollars, auto above a trillion dollars, far more subprime auto than we saw in 2008, 2009, which makes that type of portfolio even that much more volatile, a mortgage portfolios well above seven $8 trillion dollars. And what’s very new in this cycle, which you and I didn’t see in the last cycle was fintech, right? The financial technology companies, the prospers of the world, the on-decks, the lending clubs, which don’t seem to do a tremendous amount of underwriting, or at least not the conventional underwriting that you and I were used to. So I think it’s going to be very interesting to see where everything goes. You can only hope that a lot of the lenders, the banks that we know, have prepared for this, they’ve done a tremendous amount of underwriting, their portfolios are clean, they continue to staff up from the perspective of FTE to handle the outbound phone calls and inbound phone calls that are necessary to manage a delinquent portfolio. But Buddy, it’s kind of interesting today, and I want your perspective on this. And we’ve talked about it a lot. In ’08 and ’09, we didn’t have the Consumer Financial Protection Bureau. Right? So and you’ve told me many times before you think that what the whole Frank Dodd legislation that was probably the most important thing that came out of that legislation in terms of working to make a better partnership between the originator and the consumer. So how do you see regulation playing in over the next five to six years?

Buddy Beaman : 5:45

Right so think about this though, you know, when we were in this space in ’08 and ’09, the CFPB wasn’t even around, right? So we didn’t have the compliance that we have today, which is positive overall affect. I mean, I’m not knocking the CFPB at all. But we’ve seen complaints decreasing year over year for the last three years, when things have kind of stabilized until this year. Through May of this year complaints are up about 31%. Meaning that there’s a lot more complaints and it’s, I think the highest reason why is because of the COVID crisis. You know, you’ve got people that are struggling and it’s causing the bank staff to staff up and take these complaints because it’s not our debt buying entity. This is across the financial institution. So, I think in some cases, it’s going to help us obviously stay more compliant, but you’re also going to take more resources to stay compliant, it’s going to take more time to rebound. And again, I think it goes back to the payment plan, you know, that we discussed that may work. There’s some masking to this whole crisis because we haven’t really felt the impact, you know, once we come out of it is where we see the impact.

Jay Stone : 7:05

Right. Yeah, I agree with you. I think and you and I have discussed this relatively within the last week or so, that with the math, the math, as you’ve always told me doesn’t lie, and the fact that unemployment will have a good idea of where it’s going to stabilize, probably sometime in the fall, if not in the early winter. Charge-offs, as you said, are probably going to be well over 10%. There’s going to be a lot of paper on the street in terms of consumers that are defaulting on their loans. You know, when we talk about what banks should be doing differently, and you and I have said this time and time again, now it becomes a staffing issue. You hope that all the underwriting that you’ve done over the last seven to 10 years, pays off, and that while times were good, and while we were embracing a bull market, that the loans that were being made were being made to creditworthy people that even in a tough time are going to try to resolve that, whether it’s through payment arrangements, whether it’s through deferring payments. But even if that is the case, you’re still going to be dealing with billions and billions of dollars that are going to go past due or 180 days in the credit card arena. So, I think as you said, you got to be properly staffed internally. I think a lot of these big lenders have made a decision in the last 10 years to cut back, whether it’s in the non-performing loan space on workout professionals, you definitely want to gear up there again, and you certainly want to have the internal staff that calls on behalf of the bank, staffed appropriately because you’re going to be dealing with a lot of consumers and you’re gonna be dealing a lot of frightened consumers that have never seen unemployment at these rates. Again, we’re going back to the Great Depression and we hope everyone fares through this storm well.

Buddy Beaman : 8:54

Agreed.

Karen Bubrowski : 8:55

All right, thank you guys, really appreciate your time today for sharing your smarter perspectives. That’s all the time we have for today. For other Smarter Perspectives, visit HilcoGlobal.com. Transcribed by https://otter.ai