Collector - October 2017 - 35
ON THE RISE:
SPECIALTY FINANCE PAPER
is showing increased interest in the market.
Strategic acquirers continue to look at
opportunities for moving toward earlier
stages in the delinquency cycle. Businesses
that have a high portion of early-stage work
rather than late-stage work are garnering
higher valuations in the market today.
The Consumer Financial Protection
Bureau's announcement in June that its
substantiation rulemaking is best handled
by hearing from first and third parties at
the same time signaled the differentiation
of the first-party creditor and third-party
servicing model. The CFPB acknowledged
that first-party creditors have information
that is not always readily available to thirdparty servicers.
In July, the CFPB also announced that
Ohad Samet, co-founder and CEO of
TrueAccord, was appointed to its advisory
board. Samet is the only debt collection
industry participant on the board, and his
company, TrueAccord, relies much more on
technology than a traditional third-party
collection agency. The movement in the
rulemaking going forward and shift toward
technology-enabled services, following the
CFPB's comments and announcements, will
be an important trend to watch.
DEBT PURCHASING CONTINUES TO
PICK UP STEAM
On June 30, the JH Capital Group
announced its plans to go public in the
third quarter of 2017. JH Capital will trade
on the NASDAQ exchange under the ticker
JHCG. As a point of reference, the last
ARM servicer to go public was Performant
(NASDAQ: PFMT) in 2012. The news from
JH Capital substantiates the debt buying
opportunity that exists within the U.S.
today. The transaction will provide JH
Capital with access to increased capital to
put to work in the market.
JH Capital's management team is very
bullish on major creditors (Wells Fargo, Bank
of America, Chase, etc.) re-entering the market
in the near term, adding an estimated $29.8
billion into the debt buying market. JH Capital
estimates that this would more than double the
available debt purchasing market today.
The popularity of debt purchasing is
a continuation of a trend that started
picking up traction earlier this year. SRA
Associates was acquired by Global IT Sales
in January 2017, mainly to expand and grow
the collection platform into a hybrid debt
purchasing and servicing platform. SRA
Associates has been a leader in the thirdparty auto delinquency servicing sector,
providing proprietary knowledge into auto
paper liquidations out in the market today.
In early June, a bankruptcy judge in
New York approved the sale of SquareTwo
Financial to Resurgent Capital, agreeing to
invest $405.1 million into SquareTwo, The
Wall Street Journal reported.
While much of the focus today has been
on the growing opportunity within the U.S.
market, the European market is gaining very
notable traction. Bloomberg recently quoted
the European non-performing loan market
at around $1.1 trillion.
Nordic Capital, a private equity firm
focused in northern Europe, is among many
investors today that are bullish on the market.
On June 27, Nordic Capital announced that
Intrum Justitia and Lindorff completed a $4.4
billion merger to create the largest receivables
management firm in Europe. Private equity
remains heavily interested in the ARM sector
and the opportunities that exist for debt
purchasing and servicing.
Michael Lamm is managing partner
of Corporate Advisory Solutions.
He can be reached at mlamm@
An increasing amount of debt
purchasers and servicers
are moving into specialty
finance receivables. Specialty
finance paper is attractive to
the receivables management
industry largely due to the variety
in balance sizes, which can be
tailored toward a size conductive
to a servicer's competitive
advantage. As a point of reference,
a small loan can be made and
granted online in a short amount
of time, with some taking under 10
minutes to complete.
We're witnessing a reemergence
of subprime lending, exasperated
by the popularity in specialty
finance platforms, which are
targeted at Millennials, and nontraditional lending metrics. More
lenders are willing to take on
riskier borrowers in attempts to
seek growth and high yields.
Some of the largest online lenders
also have relatively low verification
standards. Two of the largest
online lenders stated that they
currently only verified a third of
the income for some of their most
popular loans. Others have stated
they did not check key borrower
data, like employment or income,
on up to a quarter of the loans.
These firms are using different
scoring models to determine
consumers' propensity to pay.
Many of these companies are
writing off increasing portions of
their loans. Along with growing
volumes, discussions with
marketplace participants revealed
that specialty finance paper has
historically shown higher gross
margins than some of the other
asset classes being worked today.