Debt Collection Puts On A Suit

As consumer loans hit an all-time high, the industry gets more sophisticated

Debt collectors are going corporate. Although the $15 billion-a-year industry still conjures up images of no-neck goons pounding on people's doors, collection agencies are cleaning up their act and tapping Wall Street for money. In the third quarter alone, private-equity firms, venture capitalists, and others invested a record $1.6 billion in the business, almost as much as in all of last year. Six firms are now publicly traded, and two made secondary share offerings this year. Instead of guessing which deadbeats might pony up, firms are using sophisticated software to spot the best bets before buying bundles of bad debts from banks and credit-card companies.

What has captured Wall Street's attention is the mountain of debt that Americans keep piling up. In the past five years, consumer loans have jumped 25%, to a total of $2.1 trillion. The bankruptcy reform that took effect on Oct. 17 promises more business for collection agencies because the new law makes it much harder for many people to dump their debts by going to court. "It won't be as easy to absolve your debts with one stroke of a judge's pen," says James O'Brien, a financial services analyst at Brean Murray & Co.

Those trends are attracting big names into the business. In September, one of Citigroup's venture-capital funds bought a controlling stake in Receivable Management Services Corp., a Bethlehem (Pa.) outfit specializing in business debts, and student lender Sallie Mae bought a company that buys bad home loans. The dealmaking is set to continue: There are still 5,215 collection agencies in the U.S. with an average of just 19 collectors each, according to the ACA International, a trade group. "The industry is large, fragmented, profitable, and growing," says Michael Ginsberg, whose boutique investment bank, Kaulkin Ginsberg Co., follows the sector.

The new players are changing how the industry operates. No longer do the top agencies merely collect past-due debts and get a percentage of what's recovered. These days they buy large portfolios written off by lenders, taking on the risk of collection themselves. A portfolio might sell for just 2 cents on the dollar but yield as much as 6 cents. The value of all bad-debt purchases has more than doubled since 2000, to $77 billion last year, according to industry trade publication The Nilson Report.

Leaving Dodge City
The industry is using the latest database technology to handle this fast growth. To avoid less profitable accounts, San Diego's Encore Capital Group Inc. looks at historical data on collections to analyze the debt portfolios before it buys them. If certain people are "making payments on their mortgage and auto loans but not on their credit cards," explains Encore CEO J. Brandon Black, "they are much more creditworthy than a consumer who has had a home foreclosure."

Of course, a chunk of the industry still operates by Dodge City rules. In July the Federal Trade Commission won a $10.2 million judgment against the principals of a now-defunct Secaucus (N.J.) company called National Check Control. It accused the firm of making repeated phone calls, threatening consumers, and using obscene language. Last year the agency shut down a Rockford (Ill.) outfit, Capital Acquisitions & Management Corp., after receiving more than 2,000 complaints of harassment and deceptive practices.

Although the industry is going corporate, it continues to be plagued by high turnover. Asset Acceptance Capital Corp. in Warren, Mich., the largest of the publicly traded players, narrowly missed its earnings expectations when it reported third-quarter results on Nov. 1. The company blamed the shortfall on its high employee turnover rate -- 85% a year. Collecting debts may be lucrative -- but it's still not a whole lot of fun.

Most recent comments


Review: People are quick to judge debt collectors. They think all we do is harass people. The truth is we are the ones who are harassed. Debt collectors have to go by a strict set of rules when making phone calls, but the debotrs are the ones who use the vulgar and obscene language. They act like we are the ones who forced them to overspend and treat us harshly for asking them to Ppay back the money they borrowed. They think, "How dare these people call me to remind me that I owe money."

Date reviewed: Oct 11, 2006 9:05 PM

Nickname: Bill

Review: Give me a break. Buying defaulted loans for less then a penny on the dollar and then harassing the people that owe the money is not a legitimate business. These people are crooks and that couldn't tell someone the truth if their life depended on it. Bullying people into paying a debt that these companies had no part of is ridiculous and their only true expense is labor. Profit margins are great 500-1000% over cost but government should and will put these businesses in their place.

Date reviewed: Apr 15, 2006 12:06 AM

Nickname: BG&B 8002840100 x 1242

Review: In this global economy, bigger isn't better. What it comes down to isn't the lowest rates. It is about results! People, debt is turning into a bidding war from Fortune 50 to mom and pops. Time is money, so it would be wisest to pass your past due to a niche size firm such as Baker Govern and Baker, which has a collection ratio of 60%-85%--rather than Gluton sized firms mentioned above that do not value your business with collection ratios of 1-10%. You do the math.

Date reviewed: Jan 13, 2006 6:30 PM

Nickname: TimSutton

Review: The debt collection industry is not only going corporate but also global. As the world flattens, companies such as Global Recovery know no physical borders when it comes to international and worldwide debt collections.

Date reviewed: Nov 17, 2005 9:19 AM

Nickname: mab

Review: Nice but a little on the lame side. This was not the in-depth BW article I would expect. You should name names, talk about the companies like Encore and Asset Acceptance who are also doing well, talk about the software like Intelligent Results, Narex, and American Logistics, as well as other trends in the industry.

Date reviewed: Nov 4, 2005 8:25 PM

Nickname: Tony L

Review: It is about time that collections agencies got a good rap for the job we do. We are all not thugs or goons. This business is now about courtesy and liquidation. It has become much more scientific over the last 10 plus years.

Date reviewed: Nov 4, 2005 6:22 PM

Nickname: Arthur

Review: How did you leave out NCO Group? They are the largest industry player in accounts receivable management and deb collections.

Date reviewed: Nov 4, 2005 5:45 PM

Nickname: jeffhardy

Review: The "corporate-ization" of the collection industry is a welcome change. Not only does the sophistication improve performance, but it brings in a new level of accountability and will help us all identify the "black hats" that still use abusive and blatantly illegal tactics. We deal with collections companies on a daily basis as we help consumers get back on their feet. The difference between a rougue outfit and a professional one is substantial and encouraging.

Date reviewed: Nov 4, 2005 5:41 PM

Nickname: MichelleDunn

Review: Many new and larger agencies are offering additional services other than just debt collection, such as letter services and accounts receivable outsourcing. They want to be a creditor's one-stop shop for all those payment issues, thus making more money.

Date reviewed: Nov 4, 2005 12:35 PM

The views and opinions expressed in these comments do not necessarily reflect the views or opinions of BusinessWeek or the McGraw-Hill Companies.

Other Debt Collection/Debt Collector News Media Articles


See Also:


Debtors Rights

Cease and Desist Letter

Sue Debt Collector

Your Right to Validation of Debts to Collection Agencies

Dealing With Debt Collections

Dealing With Debt Collectors

Get Debt Collectors Out of Your Life

Federal Trade Commission Opinion Letter on Validation

Federal Trade Commission Publications

Statute of Limitations

Fair Debt Collection Practices Act



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