From Contract to Collection: Selling Debts in Consumer Finance - Decisimo

What is debt selling and why is it done?

Debt selling is a common practice in the consumer finance industry, where lenders or creditors sell their portfolios of unpaid debts to other companies or individuals. The primary motivation for selling debts is to recoup some of the losses incurred due to non-payment by the borrowers.

Ensuring Compliance To Prevent Lawsuits

• Importance of contracts with customers allowing for the sale of debts
• Checking local regulations and restrictions on the sale of debts

Before selling a portfolio of debts, it is important to ensure that the contracts with the customers allow for the sale of debts. This typically involves including a clause in the contract that allows for the transfer of the debt to a third party.

It is also essential to check local regulations to ensure that the sale of debts is legal and complies with any restrictions or limitations that may be in place.

For example, in some jurisdictions, there may be restrictions on the sale of debts that are not written off, not too far past due, or that are associated with certain types of accounts.

Danger of Not Having Proper Documentation

• The role of contracts, invoices, and other relevant documentation in the sale of debts
• The importance of properly documenting every step in the process

The proper documentation of the sale of debts is crucial to ensure that the transfer of ownership is legal and enforceable. This may include contracts, invoices, and other relevant documentation. It is important to carefully document every step in the process to protect the interests of all parties involved.

How Pricing of Portfolio is Done

• Considerations for determining the price of a portfolio of debts for sale
• The role of the probability of recovery, cost of recovery, and cost of money

When pricing a portfolio of debts for sale, it is essential to consider the probability of recovery if the lender were to handle collections themselves. This involves taking into account the potential amount that could be recovered, the cost of recovery, and the cost of money (i.e., the interest rate). The price of the portfolio should be discounted by the cost of money to reflect the time value of money.

How Decision Engine Can Help Price Portfolio

A decision engine can be used to develop a decision strategy for pricing portfolios of debt. The decision flow would incorporate all of the factors discussed, including the probability of recovery, cost of recovery, and cost of money, to provide an overall price for the portfolio.

Additionally, the decision flow would take into account the ability to recover the asset value, as well as any legal and compliance considerations, such as contracts with customers and local regulations.

Why Segmenting is Helpful for Buyer Selection

By using a decision engine to guide the pricing process, lenders can make informed decisions that balance the need to recoup losses with the potential risks and benefits of selling to a particular buyer.

It's important to segment the portfolio into different products to be recovered, such as one-time loans, installment loans, and revolving loans, as each of these products may require a different pricing logic.

Optimizing Portfolio Pricing using a Decision Engine

This approach can be easily implemented into a decision engine, to give a price to the portfolio based on the chances of recovery and the costs involved, thus helping to maximize the returns and minimize the risks.

The pricing process can be run as a batch process on a regular basis when the maturity of accounts for sale approaches, making it a standard process and ensuring that the portfolio is priced optimally.

Selecting a Buyer

• Factors to consider when selecting a company to buy a portfolio of debts
• The importance of considering the size of the accounts and potential regulatory and public relations risks

When selecting a company to buy a portfolio of debts, it is important to consider the size of the accounts that the company is interested in purchasing. Some companies may be more interested in purchasing larger accounts, while others may focus on smaller accounts.

It is also essential to consider the potential regulatory risk and public relations risks associated with the company.

If the company that buys the debts uses questionable or illegal methods to collect the debts, it could reflect negatively on the lender, as customers may associate the debt with the lender rather than the collections agency.

Why Navigating the Complexities of Debt Selling Matters

• The complexity of the debt selling process and the importance of considering various factors
• The role of proper documentation in protecting the interests of all parties involved

To effectively sell a portfolio of debts in the consumer finance industry, it is necessary to carefully consider various factors, including the terms of contracts with customers, local regulations, and the potential risks and benefits of selling to a particular buyer.

Specifically, it is important to ensure that contracts allow for the sale of debts, comply with any relevant regulations, and take into account the probability of recovery, the size of the accounts, and the potential regulatory and public relations risks when selecting a buyer.

By taking these considerations into account, lenders can successfully navigate the complex process of debt selling and protect their interests.