Risk is the main reason lenders don't sell their NPLs.
Lenders often underestimate the level of effort and expertise required to sell delinquent portfolios effectively and compliantly. Common obstacles that lenders encounter when attempting to manage their delinquent loan portfolios include:
- Perception of Risk: Risk in three main areas as outlined above – regulatory, brand reputation and financial.
- Compliance Concerns / Regulatory Risk: The change in account ownership and management can have legal and compliance implications if the debt buyer violates collections laws. While some debt buyers are extremely clear in detailing their compliance adherence, there is no guarantee the buyer that acquires your accounts will be the last person to own them. This potential regulatory risk should be top of mind when deciding on any new vendor. Lenders should be especially cautious when deciding on a potential debt buyer, especially if they have never done business with them before.
- Brand Reputation / Consumer Risk: It takes years to build a successful trusted brand. It takes minutes to destroy one. Risk to your brand is risk that cannot be tolerated. Original creditors forfeit control over the type and methods of communication with their consumers after a debt sale. If a business does not choose a quality debt buyer, they are risking negative brand experiences that could potentially dissuade consumers from working with or buying from the company again in the future. New vendors operating under their own standards bring additional risk to your brand reputation when they begin to contact your consumers. As mentioned before, consumers may be unaware of a debt sale and therefore not be able to distinguish between the debt buyer and the original creditor they owe. Protecting your business’ brand reputation in collections should be a key part of your decision to sell debt.
- Financial Risk: While selling your debt can offer money for your business faster than a long-term debt collection strategy, it also means losing potential revenue later. Debt buyers pay a fraction of a portfolio’s total value, and if you’re able to build a consistent, long-term strategy you can recover closer more of the value owed.
- Lack of Resources: Who internally will handle the process? Do I have the staff, expertise, and resources necessary to manage a collection agency, oversee creating placement files, post recoveries, and manage the reconciliation process?
- Lack of Due Diligence: How can I find a reputable buyer? And, how will I evaluate them? How can I ensure that the buyer (and their agencies) are financially stable, fully licensed & insured, and regulatory concentric?
- Lack of Transparency: What are the buyer’s qualifications? Have their employees been thoroughly vetted to include background checks? What work efforts will be expended on my accounts? Will the buyer or their agency be concerned with protecting my reputation? How will I know where my sold accounts are?
- Lack of Benchmarking Data: Is the amount I am paid for my portfolio fair? Is the best price the most compliant price? How will I know if I am getting the best price, but protecting my consumers from corrosive and illegal collections practices?
Given these obstacles, it’s not surprising that many lenders write-off their delinquent portfolios and incur the loss rather than sell them. They choose to ignore the value of the revenue in these uncollected debts. However, in doing so, they are leaving a lot of money on the table that could be reinvested into new loans enabling growth and scale.