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
20 I November 2009 Collector
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?
Due to the distinct characteristics of
each asset type, it is absolutely critical
buyers understand the type of portfolio
they are purchasing.
Seller Due Diligence
Of equal importance, if not more
so, is seller due diligence—you need
to know the person or company with
whom you are doing business.