Collector - November 2009

As part of the portfolio due diligence process, general information about the accounts should be gathered to the best of the buyer’s ability, including the account open date, last payment date, date of delinquency, charge-off date, the consumer’s Social Security number and telephone number, original account number and a description of the debt.

The Due Diligence Guidelines suggest the buyer establish whether the accounts have been reported to consumer reporting agencies, and if so, which agencies. The buyer should determine what documentation and media is available on the accounts, including applications, statements, payment histories, loan agreements, collection notes and other pertinent documents. The buyer should also note the format of the document (electronic or hard copy), as well as any costs to obtain the information.

Acquiring detailed information about collection activity history on the account, both internally and externally, is also important. Buyers should identify items related to collection activity, including the last date the account was worked, what processes were used to attempt collection, settlement policies and information on collection agencies that have worked the account.

Obtaining a bill of sale for each transfer in order to help reinforce a clear chain of title establishing ownership is imperative.

“Not enough emphasis is placed upon the importance of the bill of sale and the chain of title,” Malen said. “In addition, the list of accounts attached to and made reference to in the bill of sale must provide an easily identifiable connection to the bill of sale supporting the proposition that those accounts belong to the respective bill of sale in order to help substantiate ownership when involved in litigation. Each bill of sale in the chain of title must be obtained with signatures that belong to an individual who is identified as possessing either real

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or apparent authority in order to bind the seller.”

The due diligence process must also take into account the specific asset classes of the portfolio. It is important to know the market in which you are considering purchasing debt. The Due Diligence Guidelines was recently revised to include additional considerations for specific asset classes, such as automobiles, credit cards, medical, mortgages, student loans, telecommunications and utilities.

“Buyers, especially first-time buyers, need to understand what they are buying,” Taulbee said. “There are different rules for different types of asset classes.”

When reviewing portfolios to purchase, buyers must understand the legal limitations that may exist for certain asset types. Depending on the asset type, litigation options may not be available or may be restricted.

For example, litigation is frequently prohibited on telecommunication and utility accounts. Restrictions on litigation, whether determined by law or financial agreements, often exist on medical receivables. Student loans and credit card agreements often contain arbitration clauses that may be binding on subsequent owners of the account. Thus, if buyers plan on initiating litigation or arbitration proceedings down the road, they should carefully evaluate any legal limitations.

For certain assets, the type of loan creating the account and how the loan was underwritten and approved are important factors in determining the probability of repayment. According to the Due Diligence Guidelines, mortgages that were 100 percent financed or interest-only may be indicators the asset should be looked at very carefully prior to purchase. When dealing with automobile deficiencies, determining whether the loan was originated by a credit union, national bank or captive finance company can help establish collection risk. With student loans,

buyers should determine whether the loan was originated by the federal government or a private institution. Different rules and regulations may apply depending on the source of funding.

Documentation is a key element of due diligence. The type of documentation needed will depend on the particular asset class you are purchasing. For instance, while essential documentation for mortgage accounts includes the mortgage, title insurance policy and appraisal, documentation for automobile accounts should include seller repossession files, a condition report on the vehicle prior to sale and the location of titles.

Due diligence for automobile accounts should also determine whether any repossession was done with the proper notices and timing. If not, the consumer may be able to use this lapse to avoid responsibility for the deficiency, which would ultimately affect the profitability of the portfolio.

Unique to medical accounts is the possibility the debt should have been paid by a third party, such as a private insurer or government payer. Due diligence for these types of accounts should include attempts to obtain any information pertaining to a third-party payer and the responsible party, if different than the patient.

Another consideration is the regulatory landscape surrounding the type of asset. Laws regulating the mortgage and credit industry have seen recent changes. How will these changes affect your ability to collect and recover the account?