Adam Parks (00:07)
Hello everybody, Adam Parks here with another episode of Receivables Podcast. Today I am here with my very good friend, Missy Massey, joining us from National Credit Adjusters to talk with us about the importance of debt sales in a creditor's recovery process. you know, debt sales is just one piece of the puzzle, but it's a mission critical piece of the puzzle, especially with the volume of charge-offs. expected to rise the amount of distress that consumers or financial distress that consumers are facing these days, and all of the changes to our macroeconomic economy. But Missy, thank you so much for joining us today and sharing your insights.
Missy (00:48)
Thanks, Adam. So happy to be back.
Adam Parks (00:51)
Well, I greatly appreciate it for anyone who I'm going to link your other episodes below. But for anyone who has not had the opportunity to become your friend through the years, could you tell everyone a little about yourself and how you got to the seat that you're in today?
Missy (01:02)
Sure. And I'll try to make this as short as possible. I started in recovery at a credit issue where 20 some years ago and I learned everything I needed to know about the receivables management world in that position, agencies, law firm, bankruptcy probate, and most importantly, asset sales. I've had a couple more stops along the way. I worked for a big debt buyer in Virginia managing their external litigation network. I did the same for a third party
the firm in Midtown Manhattan managing receivables for big banks. And 10 years ago, I ended up at National Credit Adjusters and originally in third party management as well. But I've been managing the purchasing side for the last seven years.
Adam Parks (01:43)
And the purchasing side is so different, but when you have the experience on the collection side where you've got experience on the litigation side, understanding how those play into the overall debt sale strategies is an important piece of the puzzle.
Missy (01:57)
So critical and I wouldn't have been this successful in the role without it. Absolutely.
Adam Parks (02:03)
So help me understand when you think about it, when you put your creditor hat on and you're thinking about where do you stand? What do I do with this rising charge off volume? How did you look at it from that perspective?
Missy (02:17)
And I'll start this conversation with if you are an active seller or a buyer in this space, this is Captain Obvious content and probably not the episode for you, right? If you're a seller that sold before or it took a break and decide maybe it wasn't best for your strategy or you've never sold before, this is absolutely content you want to listen to. So from a credit issuer space, I worked for a big company that actively sold and then had sold for a long time. So I just inherited a process. But it was a process that was critical to drive revenue back to the bottom line, which is your, your, your recoveries and
Adam Parks (02:57)
total volume collections. So when you think about it, though, is you inherited this process that required you or that kind of put everything in place from a debt sales perspective, was that process perfect? Or what did you learn about that process as you started selling debt to a third party?
Missy (02:57)
You're forecasting, yeah, your volume.
It's never perfect, right? It's always, it's a growing, living, breathing process. think times change, regulations change, business partners change, strategies change. But at the time, we went from closed, sealed, bids submitted through an email directly to us, to an online public.
limited invitation and I say public, you could see the other players, you didn't know who they were, but it was an open auction and it was timed. So we did a spectrum of strategies and we did forward flows. But it evolved quite a bit in my tenure based on the need. And listen, I went through the whole bankruptcy reform era. ⁓ We're talking mid 2000s.
Missy (04:06)
I lived through the 2007, 2008, 2009, 2010 era where charge-offs were plentiful and demand was low.
Adam Parks (04:19)
Yeah, liquidation was low at the time too. I mean, every time that we're looking at this increase in volume generally, it's coupled with a pretty significant decrease in the liquidity value.
Missy (04:21)
and the gradation was low.
Absolutely. So it all depends on the factors around you, right? So talk about market conditions today. Yes, charge off volumes are increasing, but consumer ability and consumer liquidity of the receivables hasn't deteriorated. And there's a good demand for non performing inventory.
Adam Parks (04:48)
I think
that there is a strong demand for the non performing or charged off inventory in the consulting that I've done for creditors in the past. I've always looked at how do you measure the value of this charged off asset? And I think having the three levers in front of you, do I sell it? Do I sue it? Do I collect it? And understanding how those three things are moving in the marketplace gives you a better visibility into I'm gonna call it the unknown. So those things that are outside of your control, the general consumer economic environment, the general economic environment for businesses, but as the external environment continues to change, being able to monitor those three different levers or those three different paths can help you to better understand the value of the underlying asset. Does that make sense?
Missy (05:38)
It does. And the predictability and the consumer behavior of different portfolios you may manage can change over time as well. So you talked about the three, right? Do I collect it? Do I sue it? Do I sell it? The creditor I worked for, did a little bit of everything. And sales came on the the back end for the most part. There was a receivable that we decided, it makes sense to get rid of it pretty close to charge off. So we're just going to bundle it up and sell it early. The rest of it, we'll do an early legal selection. We'll send it to a couple of collection agencies and then we'll bundle up the rest.
Adam Parks (06:15)
Well, gives you a balance and an understanding of what the liquidity looks like through those three different channels. Because if you understand what the legal litigation capabilities are from a cash flow perspective or liquidation perspective, and you understand what you can collect, then you can better understand if you're getting the right price at sale, because you can look at the net present value of your accounts and start making some determinations between those three different channels. I it's been my experience that having all three channels can be beneficial if you have the established infrastructure to manage the agencies and the law firms. But if you don't have that structure, if you don't have that infrastructure and staffing available to you, debt sales is probably the right option.
Missy (06:59)
Or if you don't want to maintain that infrastructure anymore, it can get burdensome. So to a lot of credit issuers, there may be value in eliminating internal collection strategies for a good chunk of their non-performing inventory and moving straight to a sales strategy, which lightens your load.
Adam Parks (07:18)
And for an organization who maybe has not done debt sales before, so a creditor who is exploring their charge off options, and maybe they've been sending it to an agency and a law firm to go work, which I think, for those organizations that don't have a deep recovery department, that's actually a pretty feasible solution for them. 10, 15 years ago. They had these relationships and they were kind of managing it. What advice do you have to an organization that's currently in that position? They're dealing with this legacy relationships that are managing it and they don't have true visibility into expected liquidations.
Missy (07:59)
You got to start somewhere. But I would absolutely recommend a test. So if you're nervous, okay, keep keep some of your current strategy, but split, split the volume, chunk some of it out and make sure it's a fair cut, right? We're not keeping the best and selling the worst. And some people do that, that's fine. But if you really want to get a good understanding of what the value of your receivable is, and what
Missy (08:24)
what the process would look like. Okay, keep some of it and then entertain a selling relationship.
Adam Parks (08:34)
I would tell people that the price point that they're going to get will be directly reflected by the quality of the asset that they put forward for sale. So like you had said, if you if you just want to if you want to cream the top and you just want to sell let's call it the bottom tranches, expect bottom tranche pricing, you're not going to get you're not going to get fresh credit card major bank prices for a product that is not equal.
Missy (08:51)
I see. Absolutely.
fair and if you want to understand the value of your hole receivable, do a good randomized slice.
Adam Parks (09:07)
So when you when you offer or when you suggest doing a randomized slice, are we talking about age brackets within a portfolio? How would you explain that to a creditor who's new to debt sales?
Missy (09:17)
So it would be keep or manage, maintain a similar age. So how many months has it been since charge off? You just want to make sure that your average age that you're keeping versus considering for sale is comparable and the average balance, the consumer's FICO at origination, and any other scoring indications that give you collectibility predictions post-charge off if you have that capability. Just make sure that those are all consistent.
Adam Parks (09:52)
And for a creditor that wants to put a portfolio out for sale or wants to organize themselves in a pre sale, it's called time period. What advice do you have for them? What do they need to be preparing? What things do they really want to look at within their own organization before moving forward with a debt sale process?
Missy (10:13)
There's a lot of things to consider, system restraints, internal agents and training accounting functionality? Do you really do you have the ability to completely shut down account and make sure that if a consumer were to reach out to you that you won't have a conversation that you'll refer them to the right place? Second, that can cause problems.
Adam Parks (10:33)
Sounds minor, but that's a I remember that issue. I mean, that was pretty, it was a lot more common 10 years ago, but especially for a new seller that have not had these last 10, 20 years of experience selling, there can be some challenges there. And documentation and documentation delivery, I know is always at the top of the list.
Missy (10:51)
Absolutely. And do you have staffing and or resources to manage and account for incoming payments and make sure that those get forwarded? ⁓ Inquiries from your buying partner. So if somebody calls in and says, hey, can I have extra documents on this? Or, hey, we're getting word that there was a dispute. Did you have a dispute? Was it resolved? So just somebody that can field in questions. And questions do pop up.
Missy (11:18)
You'll definitely want to make sure that we're able to service, your buyer is able to service your accounts accordingly. And that may on occasion mean contacting you for additional information that isn't readily available at the point of transaction.
Adam Parks (11:30)
Fair. I documentation is key, but making sure that we can transmit those documents, understand those documents, I think is also a big part of the process. And one of those items that directly impacts the sale price of a portfolio, the quality, the ease of documents, just how that entire process is going to flow as a creditor. If you've got everything sitting in, you know, hard copy and Iron Mountain, it's different than if I can pull it from my loan management system.
Missy (11:58)
Right.
Adam Parks (12:00)
Very different worlds to be managing. And I think as you look at the different types of creditors that have evolved over time, having chain of title in hand, I think is another one of those items that we wanna make sure are clean, clear, and understood at the time of offering a portfolio for sale.
Missy (12:15)
Right. Good point. And if you're a fintech, and this was not the case when I was a seller, right, the chain of title was an easy task to accomplish. But if there's a servicing relationship that's attached to an originating bank, and then there's investors that get involved, the ownership and transfer of each receivable
Missy (12:41)
from step to step absolutely has to be accounted for. And your buyer will want to have a clear understanding of ownership prior to and documentation of that ownership prior to your transaction.
Adam Parks (12:56)
So now that we've talked about how to kind of prepare for the eventuality of a new debt sale, so we've got a good understanding of what we need to do in order to bring it to marketplace. Before they've gone through that process though, a lot of internal discussions need to happen about the benefits and why we're actively trying to sell a portfolio. From your perspective or from your experience, what do some of those conversations look like and what advice do you have for organizations that are talking about starting the process of offering a debt sale?
Missy (13:30)
So if it's financial driven, you're probably talking a lot about your reserve, your forecasted recoveries, and what your charge off rates currently look like. So if anything looks unfavorable or is starting to bleed outside of the lines of comfort, and you need some leverage, this is a great way to improve your liquidity. Obtain some quick funds and
Missy (13:55)
put money back into where your losses are or fund new loans.
Adam Parks (14:00)
funding new loans is definitely an important part of that process, right? Being able to bring the cash back in. I think creditors sometimes get so caught up in the debt collection process, again, depending on the type of loans that they're making that they it's hard to be a master of both trades that lending and underwriting process bringing in those new customers. And what would you say to creditors that are thinking about debt sales but are concerned with maybe
Missy (14:03)
Great, keep the business going.
Adam Parks (14:26)
relending to those customers again in the future.
Missy (14:29)
So if you have a relationship with a buyer that can provide feedback for accounts that have been paid, that's a process that we manage today. And it's pretty common, especially in alternative lending spaces where consumers are loyal to your brand, right? When you want to pick a buyer that's compliant and will treat your consumer the way you treat them. So you're looking for alignment.
Missy (14:56)
in customer relations and the ability to be compliant and treat everybody fairly and with respect. But then be nimble enough to provide ad hoc reporting. And relay back items that you may need.
Adam Parks (15:11)
And so for a debt buyer that's preparing to start going down this path, what should they be looking for in the right debt buyer partners?
Missy (15:19)
I'm to say it depends on who you are as an originator in your size and what you're looking for specifically. There's a large spectrum of buyer partners that have different niche capacities, different capabilities, excel in different ways. you're a very large creditor, obviously that needs the highest level of compliance and oversight, you're probably looking for a large buyer that does business with similar entities. If you're a smaller entity that wants a one-on-one relationship and flexibility and somebody that can be nimble and responsive.
So I also think about like RMA certification, I think about those things that we look at in the RFP process and finding the right creditor partners. So for me, it's about, you know, are they certified? Are they meeting those standards? Although compliance has kind of become table stakes these days, you in 2010, it was all about one of the most compliant shop. And now I think that is when we talk about compliance, that's kind of become the table stakes. It's an expectation, but for a new seller, I think it's an important thing for them to continue to evaluate what the expectations of the people around them are. I would also say from a criteria perspective, when we're looking at debt buyers, a lot of this comes down to really what's the funding type? How are they funding these purchases? What kind of post-sale relationship am I going to be able to have to them? And what kind of resources is that debt buyer going to commit
to managing the relationship between us because there's, you know, look, there's the post-sale aspects that need to happen, right? The direct payments and other things that need to happen from a procedural standpoint, but it's also about those relationships because eventually something comes up. And it could be two, three, four years down the road before there's any kind of, anything that really comes up and having a good partner that you can communicate with, that you're comfortable with and that you have a good relationship, I think smooths a lot of those processes out because when there's trust in a relationship, it becomes a lot easier to react to anything that was unpredictable or unexpected.
Missy (17:30)
And I think compliance is always going to be important, right? It's just a world that we've developed and it's not going anywhere. It's not going anywhere. I would say you probably want to make sure you're aligning with the business partner that works with your consumer in a way that your consumer will respond well to. So you're worried about risk, you're worried about complaints. If you have a buyer that uses, has heavy reliance on a third party network, there's gonna be a lot of entities touching, there's gonna be a lot of touch points. Our company doesn't do that, right? We have our own internal efforts. We have call centers, we do SMS and email, but at the end of the day, those touch points are primarily NCA driven.
Adam Parks (18:18)
Well, I think that makes a difference as well, especially from a collections perspective and the ability to manage that. And I, you I would also tell creditors to look at organizations that can communicate in the ways in which the consumer has become accustomed. And if that means sending text messages, sending emails, if they originated this account online, they want to be communicated with online. So I don't want a partner who's just going to call them 800 times, because that's not going to be an effective methodology. And that is going to stick in the mind of that consumer when it's time for them to borrow again or to purchase a vehicle or whatever the case may be as they recover financially from whatever has impacted.
Missy (19:01)
You want a buyer partner that's nimble and can adapt to your consumers needs.
Adam Parks (19:07)
I think that's always the case though. As creditors, we've always tried to provide a good experience for the consumer, even through the distress stages and a lot of that focus on first party and delinquency stages and the text messaging and the campaigns and all of the things that have started to happen. would say earlier in the process, I mean, look, was 15 years ago, we didn't call the second somebody missed the bill. Now, three days before the bill is due, there's kind of a pre-prompting there. and how much of that has taken individual consumers out of the 30 day bucket. So even just those active communications. And then if you're looking for a debt buyer partner, looking at someone who can continue that same kind of relationship after the fact where that customer was comfortable. And I think that there's value in that even if that consumer is not going to return. When we talk about reducing headline risk,
It's about being able to extend that creditor experience into the post-charge-off world.
Missy (20:10)
Yeah, the most important thing is do your values align, right?
Adam Parks (20:15)
Isn't that the most important thing in everything though? Every relationship is like, our values align because that common ground enables respect to be built, which enables trust to be built. And then over time, that just develops a stronger bond. I think that's also one of the reasons I've always been a fan of forward flow agreements, because when you can put those relationships.
Missy (20:18)
Yeah.
Adam Parks (20:37)
I don't want say on autopilot, but when you have that recurring relationship, it's easier for both sides to make the appropriate resource commitments to ensure that that relationship continues forward. But now as I say that out loud, I also realized that a creditor who's never sold before may not be familiar with a forward flow. Could you give us an explanation of forward flow agreements?
Missy (20:59)
Sure, in layman's terms, right? So a forward flow is an agreement or a contract that you enter into with your buyer, which allows you to cut your inventory at a set time. Usually it's every month at an agreed price for an agreed term. So the most common would be 12 months. So you come to a pricing agreement with your buying partner.
You sign a contract and say, every month for the next 12 months, we're going to cut our fresh charge offs or whatever inventory it is. Maybe it's first agency recalls. We'll build the file in the middle of the month. We'll close by the 30th. But for the next 12 months, it's just a fixed process. You don't have to think about it. Your forecasting becomes easy because you know what's coming. you've got your forecasted charge off volumes and you know what your price is, your forecasting and budgeting is a lot easier to manage.
Adam Parks (21:52)
I think that's a pretty good explanation of it. For me, forward flow agreements really, again, put that continued commitment of resources in place. It enabled through those regular transactions, the building of a relationship because anything that came up within those transactions, we had these regular touch points, we were always in communication and it enabled for the growth of a relationship to where it finds that right balance to where it's not.
We're not over communicating now. We're not wasting time and communicating more than we need to. But at the same time, there's an appropriate touch point throughout the process that enables us to continue to build a relationship. And people do business with the people they like. And if you get the opportunity to work with somebody regularly, that's the real opportunity to build a relationship.
Missy (22:41)
I And I've known flow agreements to go for years, right? So at some point, maybe you want to renegotiate pricing or reassess where market is. But at the end of the day, I often see that after that process, your seller reengages with their current partner.
Adam Parks (22:59)
But relationships remain. I don't know if it's an equally important, but it's definitely a very important aspect of that process as well.
Missy (23:07)
That's a good point. I also think it's fair to comment on that, Adam, and say if you have an outlier or you've got a rogue bid and you're really excited because, I didn't expect to see that kind of pricing, just be cautious because you don't know what that comes with. You don't know what the risk is. You don't know how that partner will treat your consumers or what tactics they may take to try to recover on that receivable. single outlier is dangerous. I agree wholeheartedly that a single outlier is actually more dangerous than valuable. There's no way that the amount of money in the increased bid is going to offset the risk that's associated with selling to somebody who is so far outside of market norms.
Missy (23:37)
Just a word of caution.
Yep, agree. And generally you'll see a good chunk of your players come in around the same place. And that's your comfort zone, right? That's the happy spot for risk and reward.
Adam Parks (24:02)
I that's generally a pretty good comfort zone because
if a group of organizations are looking at a price point and saying this is this fits within our investment model, it's a manageable price point. But it can become quickly an unmanageable price point. If somebody is continually overpaying for portfolios, eventually something happens within their organization where either they start cutting corners in order to achieve the returns that they need.
or they're going to take other action, but that's where the risk starts to lie if that company goes under or starts cutting corners. And that's a bigger risk than is necessary. I prefer to focus on, if somebody's so far outside of the standard deviation, I like to look at the bids and then say, here's my standard deviation on the, let's call it the average bid and how far outside of that standard deviation is one of those outliers. And I know it's probably a little statistical, but I think it's a good guiding light when you start thinking about what that pricing looks like as it comes in.
Missy (25:02)
Yep. And I'll always say it's good to a variety of offers to consider. And it's always a good idea from a seller's point of view, never to have all your eggs in one basket. It's good to have a couple of strong partners in your pocket, because you never know when somebody's situation can change. And if you're only dealing with one buyer, you're left in an uncomfortable spot. With forecasted revenue,
lost and nowhere to go exactly.
Adam Parks (25:29)
And now you got to go build new relationships and establish new train tracks with a new organization and the infrastructure required to be able to move the documents back and forth in the comfort level with that transmission and reception of documentation.
Missy (25:42)
under the president.
Exactly.
Adam Parks (25:46)
I know this was a little bit 101 today, Missy, but I really do appreciate you coming on and sharing some insights because there is a segment of our audience that has not sold before, has not been through the process, and I want to continue to provide great content for a great industry. So I really do appreciate you coming on and sharing these insights today.
Missy (26:04)
It's a lot of fun, Adam. Always glad to be here.
Adam Parks (26:07)
Well, we really do appreciate you. For those of you watching, if you have additional questions you'd like to ask Missy or myself, you can leave those in the comments on LinkedIn and YouTube and we'll be responding to those. Or if you have additional topics you'd like to see us discuss, you can leave those in the comments below as well. And hopefully I can get Missy back at least one more time to help me continue to create great content for a great industry. But until next time, Missy, thank you so much. I really do appreciate all your insights today. And thank you everybody for watching. We'll see you again soon. Bye.
Missy (26:30)
Thank you.
