Maximizing the Results and Reducing Enterprise Risk of Repossession EffortsBy Michael Levison
Exercising your right as a lender to pursue the repossession of collateral securing a loan can be a very effective tool in a lender’s collections effort. If used properly, pursuing repossession can be a very cost effective way to actually avoid having to recover and dispose of collateral.
However, the decision to repossess collateral should not be taken lightly. The recovery and remarketing process is resource intensive and comes with a myriad of potential risks and the likelihood of a deficiency balance requiring additional legal efforts. This article will attempt to provide a best practices framework for managing the process and minimizing risk to the enterprise.
What Do You Really Want To Accomplish?
The first step in the process is to be really clear on your objective for a particular case. The savviest lenders understand that engaging a repossession firm is not just for recovering collateral. If used properly, it can be a very effective collections support tool. The introduction of a skilled, properly briefed third party that has both the authority and ability to recover the asset will often result in a change of heart by the debtor. In fact, over 50% of the involuntary repossession assignments we receive from clients end up being resolved without repossession.
Voluntary or Involuntary?
There is a very important issue that needs to be properly assessed up front. Generally speaking, repossession should only be considered voluntary if the guarantor and the person/entity in possession of the asset have clearly agreed to surrender it.
Some lenders will often rely on a weak commitment by a borrower as justification to assign the job out as a voluntary recovery, at a lower fee. This short sighted approach carries several risks. First, it may result in losing your only real opportunity to recover the asset. Once an unwilling borrower has been tipped off, they may well take efforts to conceal. You may also end up spending significantly more money if the agent has to make multiple trips. Finally, such a tactic also potentially puts your agent in danger. An experienced agent will approach an involuntary assignment much differently than a voluntary assignment because of the greater likelihood of confrontation.
Match the Agent to the Situation
For the best results, care should be taken to choose a recovery firm that fits the needs of the situation. There are several considerations:
- The most fundamental issue is the firm’s experience with the specific type of collateral to be recovered.
- If there are multiple units and locations involved, spread over a wide area, you will need a firm that has a sufficient network of agents and a proven track record of handling multi-unit assignments. The size and scope of the network also speaks to the ability to move quickly. Collateral out for repossession rarely stays in one place very long.
- Assuming that the account has been worked appropriately by your internal collections department, you may also need a firm that has a dedicated skip tracing staff, separate from the field agent network. There are many tools available for finding people and assets these days that are not generally used by repossession agents in the field.
Many lenders are not fully aware of the fact that, in many states, they are legally responsible for the acts of the repossession agents acting on their behalf. Therefore, it is vitally important that your agents be carefully selected, contracted and insured.
If you rely on national firms to manage recovery activities they are likely subcontracting the work out to local agents. For a large multi-unit assignment, there could be literally dozens of independent agents involved…whose actions are ultimately the responsibility of the lender.
Your recovery vendor should have a thorough process for selecting its agents, a valid contract with every agent it utilizes, copies of necessary licenses and permits, clear insurance coverage requirements, and a tight process for monitoring the status of the agent’s insurance policies. Without these mechanisms in place, you are a sitting duck! In today’s climate of reduced repossession volume, many agents are cutting corners in order to reduce costs. Their insurance coverage is often the first target.
Avoid Being Penny Wise and Pound Foolish
Selecting a repossession firm based on their competitive fee schedule can often end up being the most expensive approach. You often only get one shot at recovering collateral. A less experienced (and thus lower cost) operator may mishandle the situation and lose the best opportunity that you have for recovery.
The recovery rates at skilled firms can be 15%-25% higher than others. Given the relatively high equipment values involved, paying more for a higher level of skill typically pays off exponentially.
In addition to overall success rates, the ability of your recovery firm to resolve a meaningful percentage of your assignments without repossession can also significantly impact cost. Fees for “debtor-lender” agreement resolutions generally run much lower than repossession fees. Therefore, your average cost per resolved case, will likely be well below the stated repossession fees.
A Few Final Tips
There are a few other things that you can do to ensure your recovery efforts are optimized:
- Provide your recovery firm with full information. Access to full borrower details, collector’s notes, guarantor information, outstanding balance and settlement terms can often be the difference between success and failure.
- Once your recovery firm has established contact with the borrower, allow them to handle the negotiations from that point on. Debtors can be quite skilled at playing one party off against another.
- Avoid putting the assignment on hold if the debtor makes flimsy promises to pay shortly. At that stage, it is important to maintain maximum pressure.
- Insist that your recovery firms find innovative and low cost ways to transport the asset to your desired destination. Conducting simple repairs rather than towing can make a huge difference in cost. Also, finding efficient ways to transport multiple units is very important.
Collateral repossession is not necessarily something that should be viewed as a last resort. When used properly, it can be a valuable portfolio management tool.