Collections & Recovery | Erin Kerr First-party collections update | Receivables Roundtable Ep. 142

Adam:
Hello everybody, Adam Parks here with another episode of Receivables Roundtable. Today I'm here with my friend, Aaron Kerr, who is the Director of Collections and Recovery presented by ARIAMA Roundtables. How you doing today, Aaron?

Erin Kerr:
I am doing really well, Adam. Thank you so much for having me today.

Adam:
Absolutely, I know that my audience definitely knows who you are through all the writing that you do for Collections and Recovery and all the great news and articles that you're covering on a day-to-day basis But for anyone who has not had the opportunity to meet you directly Can you tell everyone a little bit about yourself and how you got to the seat that you're in today?

Erin Kerr:
Sure, absolutely. Thanks so much. I am Erin Kerr, like he said, Director of Collections and Recovery, which is a publication now brought to you by ARIAMA Round Tables. It's an Inside Arm brand. And I spent about nine years in the third-party collection space up until the time that I joined Inside Arm in 2021. I had various roles. Some were in compliance, some were dealing directly with consumers, and... Most recently, before I joined Inside Arm, I was the director of digital strategy at MRS BPO, where I worked on several of their digital strategies and tools, which was really a lot of fun and not somewhere I thought I would end up in my career. And then when I saw an opportunity open at Inside Arm to write about those kinds of things, I thought this is great because I studied writing and English in college and thought it was just a great marriage of my... skills, what I wanted to do with my life and my background and it's turned out really well so far.

Adam:
I would say it's turned out really well. I definitely enjoy reading all of your articles. But now that you're with Collections in Recovery, can you tell everybody a little bit about the publication and what you guys do there?

Erin Kerr:
Yeah, absolutely. So Collections in Recovery is InsideArms resource for creditors. And what it focuses on is that first party collections in recovery strategy. It started out as, and many of you will probably remember this, the strategy and tech conference for InsideArm, which I don't think ever happened in person because of COVID, but was a virtual conference that we hosted a couple of times. And we sort of, you know, we were thinking through who can talk about strategy and technology, and also, how can we better serve our third party readers, of which we had very many.

Adam:
Mm-hmm.

Erin Kerr:
And we did a little bit of market research and found that there was sort of an information gap in that first party collections and recovery department space. There weren't a lot of resources, there wasn't sort of a one-stop shop for strategy and technology conversations. And we decided to rebrand strategy and tech to collections and recovery, which is... The product really is a once a week newsletter that I put out every Thursday and we cover trends, compliance news, and how to guides, deep dives into what collections and recovery professionals at banks and lenders need to know right now.

Adam:
Mm-hmm.

Erin Kerr:
A lot of that is looking at different financial trends, but it's also looking at what's happening in the third party space and how that needs to translate to the first party space. Many, many times in my career in third party agencies, I saw that the first party folks didn't quite understand all the regulations that went into creating a third party strategy. So I thought maybe I could help bridge that gap there too.

Adam:
Very interesting. And now you're on top of all of the trends that are happening in that first party space. And I know that we're seeing a lot of changes in that first party space, right? Like collection strategies are changing at the creditor level, which changes everything for third party as well. What are you seeing right now is kind of the hot topics that are coming down in the first party space.

Erin Kerr:
Yeah, I think there are a few things happening right now. I think with the sort of advent of digital collections, you're seeing a lot of the first party folks keeping their paper a little bit longer. And so that forward flow hasn't been there for a lot of the third party agencies, which I think everyone is sort of seeing that right now.

Adam:
Mm-hmm.

Erin Kerr:
I also see a focus on this continuation of customer experience. So if you are a largely digital like FinTech, for instance,

Adam:
Mm-hmm.

Erin Kerr:
you're probably not gonna engage with a third party collection agency that is not digital. That's a paper or a letter and call shop,

Adam:
Mm-hmm.

Erin Kerr:
for instance. And I see also sort of the reemergence of legal strategies post-COVID, which they were on hold for a while and now they're sort of picking up again.

Adam:
Mm hmm. Well, that makes sense. I mean, and now we're also seeing changes from a student loan perspective, right?

Erin Kerr:
Thank

Adam:
And

Erin Kerr:
you.

Adam:
the student loan world is I'm not going to call it influx, right? Like what we know so far is that loans were made available, or loans are made do again as of September 1 of 2023. And that credit delinquencies can't be reported until September of 2024. But how do you think this is going to have an effect, you know, all of this kind of coming back into the economy?

Erin Kerr:
Yeah, I'm not going to get into the collectability of student loans and what that'll look like, but I will talk a little bit about from a macroeconomic perspective what that might mean. And, you know, I can start by saying I'm a millennial. I'm sort of this person. I have a lot of friends who have student loans that are coming due again, and I have seen that on a regular basis. And I think... maybe in the collection space we're a little bit ill prepared because I think all of a sudden folks are going to be missing that $200 to $300 that they had every month to make payments that were smaller, especially on buy now, pay later loans, those kinds of things

Adam:
Mm-hmm.

Erin Kerr:
that the agencies and the first party folks really need to be focused on how to get consumers to prioritize their loans. There's a ton of people who have student loans. I think... It's like $1.64 trillion in outstanding federal loan balance. And of those, the majority are federal, which is they're going to start these payments again with the interest and interest rates are high and refinancing isn't going to do very much to help

Adam:
Mm-hmm.

Erin Kerr:
except for potentially stretching out the loans so the payments are lower on a month to month basis. So I think it's going to be a little bit of a shock when folks don't have that. that extra $300 in their checking account every month, and maybe they're behind on some of their smaller loans, personal loans, or like I said, buy now, pay later, or fintech loans. And it's time to really, I think, focus on how exactly you're gonna collect that money when there's a lot less of it to go around.

Adam:
Well, agreed, I think even existing payment plans, right? If you've got payment plans in place with consumers right now, those are at a have a higher risk level than they've had in a long time, because now there's all of these other expenses that are starting to pile up there as well, you know, with the student loan coming back into play. And so what's the first thing they're going to cut an essential service like electricity and or their water bill, or are they going to cut on a payment plan that they have with an outstanding collector today? So I think that there's a lot of challenges that are going to come from this economic cycle change? From a creditor's perspective, how are you starting to see more activity or more fear, or how do you think that they're gonna take that from a risk tolerance perspective?

Erin Kerr:
Yeah, I think it's been a little bit quiet, but I do think that some of the collections departments at these banks and lenders are preparing and they're doing that through updating their messaging to indicate to consumers, you know, maybe it's a small balance and hey, you only have a few hundred dollars left on this, maybe get it paid off before that loan kicks in again, which I mean, we're getting very, very close to that. But,

Adam:
Yeah.

Erin Kerr:
you know, I think in the last few months we've seen that. I also think. there's been focus on finding incentives to get those debts paid off before they go super delinquent. And just like I said, updating the messaging to consumers who are in that student loan population, which is a lot of consumers. But it'll be interesting. I think we'll see, this is just a prediction, I think we'll see some of that forward flow and that third party space increase

Adam:
Mm-hmm.

Erin Kerr:
as that paper becomes harder and harder to work. on a digital level because people just have less money. I mean, things are way more expensive now than they were when these student loan payments were paused.

Adam:
Mm-hmm.

Erin Kerr:
And, you know, car payments are higher, you know, necessary goods are higher priced than they were three years ago. So I think we're gonna see a lot of movement, you know, an uptick in delinquency and a movement back into third-party collections is my prediction.

Adam:
I think a lot of consumers didn't take that additional $300 in their budget every month and put that in a savings account for when student loans kicked back in again. I think it ended up getting baked into car payments and other things in the expansion of lifestyle. I think that's going to cause... The backlash from that is going to cause some financial hardships and that's ultimately what ends up in the third party space, is a lot of consumers are unable to pay their debts. And so I think it's gonna be a tough balance over the next couple of years as we look at that influx that's coming, I've seen a couple of chain car dealers, for example, that have filed bankruptcy, one in Florida very recently. And I'm curious as to how some of this is gonna start to play out and which bills are going to be prioritized by consumers and why.

Erin Kerr:
Yeah, I think we know that consumers prioritize their housing and their car payments, the secured loans and rent, electricity, like you mentioned, their phone bill, water, gas, electric, et cetera, prioritize those obviously. From there, I think there's a little bit of a feeling, and this is just anecdotal, that consumers are not going to immediately prioritize their student loans, but I also know from experience and... a lot of my peers that they in fact do prioritize that,

Adam:
Mm-hmm.

Erin Kerr:
despite the fact that it's not secured and the rules around collections are a little bit different than, especially at the federal level, are different than they are for a credit card, for instance. So I think something that would behoove creditors too is to educate their consumers. pay off the highest interest rates first, that kind of thing, you know, these financial methods of getting out of debt and, you know, making that an easy path for consumers. So I think it sort of remains to be seen how it's going to affect the economy as a whole, but I think you're right. They weren't saving those payments for a rainy day.

Adam:
Mm-hmm.

Erin Kerr:
So, you know, we'll see what happens.

Adam:
Well, lifestyle shifted right besides the inflation. I think you saw a massive expansion of lifestyle choices, whether that be during COVID or even post COVID when people were coming out of their homes and back out into the wild and the spending. And if you look at luxury goods, I mean, that has expanded exponentially. Even the marketplaces for all different types of luxury goods have continued to expand. So I think that there is, you know, this kind of looming threat, you know, and I've seen quite a few case studies recently looking at some of the economic data and just the rise in delinquencies across various product cycles. And I think you'll have some consumers that will shift between different opportunities and you may see some prime become subprime. And I think you'll see some shift of the consumers within that marketplace. Outside of the student loans, are you seeing anything else that's kind of a real hot button right now for the first party space?

Erin Kerr:
Yeah, I mentioned it when I was talking about the student loans, but just the cost of auto loans right now and the payments are so high. I think for the first time, payments of $500 per month were, I think, half of all new car loans. I published an article about that a few months ago at CollectionsInRecovery.com. But I mean, a $500 a month car payment is massive, I think, for most people. And it's a car payment, right? So you need that car, you need

Adam:
appreciable

Erin Kerr:
to make that payment.

Adam:
asset. Yeah.

Erin Kerr:
Yeah, so, you know, I think that keeping an eye on delinquency rates for auto loans is gonna be really important. If we see those

Adam:
Mm-hmm.

Erin Kerr:
start to tick up really high, I think that's an alarm bell and we need to sort of get, you know, the credit governance in order on the front end for originations, which are down a little bit anyway, I think because

Adam:
Mm-hmm.

Erin Kerr:
of all of the things, all the pandemic era programs are ending now. So I think we're seeing that, but I would keep an eye on those auto loans, even if you're not in an auto loan space, because it's going to really dictate how much money people have. They're going to prioritize getting that car loan paid

Adam:
Mm-hmm.

Erin Kerr:
and not necessarily their unsecured credit cards.

Adam:
Well, when you hear about people stretching out the payment terms, right, and going to like 84 month loans, which on an asset that's depreciating, you know, they're not extending the longevity of the vehicle itself, right, or its usability, all that's extending is how long you are stuck in that payment plan in order to get your payment even down to something that appears to be north of $500 a month. But the cost of vehicles is definitely high right now. And It's a very strong economic indicator. When we were looking, I want to say this a couple months ago, earlier in the year, call it Q1, when you had Carvana and CarMax that were basically on the brink of bankruptcy prior to getting new funding, I mean, that many vehicles hitting the marketplace would seriously depress the values. I don't know what is artificially maintaining to prop the values where they are today, but I think at some point that bubble burst. I can't imagine that the value of a 1992 Toyota is going to maintain what it's maintaining right now. And I think you'll see a little bit of a shift in the marketplace. That's kind of a scary thought because when all of those vehicles end up upside down, the people are upside down, but so are the banks. And the banks end up with less metal on the street than is collateralized, which causes other issues.

Erin Kerr:
Yeah, for sure. I think I read a few months ago, maybe it was six or more months ago now, but one of the interesting things on the auto delinquency side was some of these cars that people were going delinquent on were actually worth more than when they bought them, if it was pre-pandemic. And so they were getting repossessed and then getting solds, and then the consumer didn't owe anything at that point, which is usually very often not how it goes

Adam:
Mm.

Erin Kerr:
most of the time. That's obviously either not going on anymore or probably won't continue for much longer, but it's just definitely an interesting shift. I think most people, again, with the education on the lender side, most people have to understand that an 84-month car loan sounds great, but are you still gonna be driving that car at that time? And,

Adam:
It sounds

Erin Kerr:
you know,

Adam:
awful. It hurts my heart to think about

Erin Kerr:
yeah.

Adam:
consumers paying out 84 months for a vehicle like that is a significant period of time to be committed to one particular vehicle and then all of the things that come with that because if you're now if you're gonna hold It for 84 months You can't get the warranties and things that you need to keep that vehicle fully functioning over that same timeline Right? Like you've got warranties that are ending, you've got potential catastrophic repairs that need to be done and you still owe money on that car. To me, I mean, it hurts my heart to think about it.

Erin Kerr:
Well, Adam, you'll be happy to know that I drive a 2009 Ford Focus that I got in 2010. So I

Adam:
Here.

Erin Kerr:
cannot relate to an 84 month car payment. And I've never been someone who truly understood, you know, needing to get that really expensive car. But honestly, a lot of the midsize good, reliable cars have been so expensive that folks need to pay more than $500 a month for them. So I totally get what you're saying. When I said 84 months sounds great, I meant, you know, the amount of the payment. per month,

Adam:
Oh,

Erin Kerr:
probably.

Adam:
yeah, is there is there coming back down and getting to that payment? But they're still putting themselves in a position even if they are getting to that payment amount now that you're extending that period of time. That risk on the tail end is significant.

Erin Kerr:
Yeah, absolutely. And I think that that's a really key indicator to just keep an eye on because, you know, these are, I mean, and we can get into housing too, although I don't know as much about that. But the cost of housing is crazy right now. And how long can people continue to pay these really highly inflated amounts for what are basic needs? Right. So I think we probably predicted wrongly at the beginning of the year that there'd be a little bit more of a bottom out. by now. I don't, we haven't hit it. I think something will happen. It might be a softer landing that a lot of folks were talking about. But, you know, when you look at the, the housing market hasn't really cooled, not where I am anyway, and the cars are not getting any cheaper. And as we continue to see, you know, disruptions in the supply chain and, you know, different strikes and things like that, I think we're in for a little bit of trouble next year on that, the originator side anyway.

Adam:
Well, I think we all know something is coming. I do hope that it's a softer landing than I'm expecting based on what I'm seeing in the numbers, because the rise in delinquency and all of these factors really do create a perfect storm. And so I'm hoping that we're avoiding that as a country on the whole, because I don't think that's something anybody wants to go through. Not everybody remembers the 80s, but we pretty much all remember 2008, right? And I don't think anyone wants to start to see consumers suffer that way.

Erin Kerr:
Yeah, I mean, I think that from a creditor and lender perspective for collections and recovery, it just will help to be prepared now. So

Adam:
Mm-hmm.

Erin Kerr:
have a plan for when those delinquencies start to tick up and just get focused on how you can best serve your consumers, right? Because it's much more, I think one of the key differences between now and 2008 is the CFPB, right? So there's this incentive to be consumer focused. where maybe that didn't exist before. I don't have a ton of experience. I can't really speak to what happened in 2008, but I think one of the key differences is centering the consumer's experience in your collections process, and you need to be prepared for that. You need to find a third-party partner who will carry on the same customer experience that your customers used to, and you need to have a digital option because if you're just calling and just sending letters, you're not gonna get paid. You need to have a holistic approach. That's not to say you shouldn't be calling and lettering, but you need to have a holistic approach and it needs to include text messages and emails and self-service. And you really should have been focused on that 18 months ago. But now is not a bad time to start either.

Adam:
Fair enough, it sounds like you've got some great advice for the first party space over there at Collections and Recovery. And Erin, I really thank you for coming on and having a chat with me today. I hope we can continue to do this over time and to continue to do these first party updates because I learned a lot from the discussion today and I appreciate you coming on.

Erin Kerr:
Yeah, absolutely, Adam, it was a blast and I'd be happy to chat about it anytime.

Adam:
Absolutely. Well, we're gonna get that scheduled. In the meantime, everybody, thank you so much for watching. If you have additional questions that you'd like to ask Aaron and myself, you can leave those in the comments on LinkedIn and YouTube, and we'll be responding to those. Or you can leave additional topics that you'd like to see us discuss in the comments below as well. And I think Aaron and I could be doing this more frequently. This was a lot of fun here today. But for everybody watching today, thank you so much for joining us. And Aaron, I really appreciate your time. This was great.

Erin Kerr:
Thanks so much, Adam. I appreciate it. For those who are listening, if you want to check out CollectionsandRecovery.com, it's just CollectionsandRecovery.com. You can also find us on LinkedIn at CollectionsandRecovery. I'm Erin Kerr. Thanks so much, Adam.

Adam:
Yeah, absolutely. We will have some links below to the website to some of the articles that we discussed, and over to their LinkedIn page as well in the in the description below. So thank you everybody so much for watching and we'll see you again soon.