Most people have experienced consumer credit from the debtor’s perspective. A person who wants to buy goods or services without paying for them immediately obtains credit from the seller of the goods or services and the buyer goes into debt owing the seller an account that is due at some time in the future. There is a written or oral understanding that the account will be paid in full or in installments according to the agreed upon terms.
If the debtor does not pay the account according to the agreed upon terms, then the seller loses some or all of his expected profit because he has to work harder to convince the debtor to pay or charge-off the debt to his profit on other sales. At times, the delay in payments may result in actually losing money on a sale due to the expenses of having to carry the account and collect it. In extreme situations, rather than lose not only his profit, but also his entire investment in the goods or services sold, a seller may have to resort to collection professionals to collect the debt.
What Is the Total Non-Performing Loans in Nigeria Banks?
Agusto & Co a Nigeria based rating Agency has said in its 2020 Banking Industry Report that commercial banks in the country have collectively written off about N1.9 trillion worth of non-performing loans between the 2015/2016 recession and now. The report in the Agency’s website said that Nigeria’s weak macroeconomic climate was a major contributing factor to the loan write-offs. It further said that the 2019 introduction of IFRS 9 accounting standard played a major part.
It said “In the wake of the unprecedented COVID 19 pandemic, the Industry’s asset quality is further threatened given significant exposures to vulnerable sectors. The Central Bank of Nigeria (CBN) has granted palliatives to banks in form of permitted loan restructurings to certain sectors that have been severely affected by the pandemic and we expect this to moderate the anticipated level of asset quality deterioration in the short term,” another part of the report said.
During last week’s MPC meeting of the Central Bank of Nigeria, Governor Godwin Emefiele said that about 22 commercial banks have so far restructured N7.8 trillion worth of loans or 41 per cent, out of a total of N19.9 trillion, for some 35,640 customers. As Emefiele explained, it would be preferable to restructure up to 65% of loans instead of allowing such loans to go bad.
Delinquent debtors cost businesses about $24 billion per year in lost capital and profits. Debt collectors play an important part in the world’s economy by returning at least some of those lost profits to businesses that extend credit to defaulting debtors.
The Role of AMCON in DEBT RECOVERY?
AMCON is currently focused on recovering the N5.6 trillion debts incurred in the resolution of the 2009 banking crisis. He reiterated that due to the rise in NPLs, another asset management company would have to be established to acquire the rising bad debt in the industry, given the lifespan of AMCON
7 Key Pillars of the 2019 Amendment
- Tracing and tracking debtors hidden funds.
- Naming and shaming recalcitrant debtors and making contracting with government subject to good standing with AMCON.
- Holding selling EFIs to their loan sale obligations and giving teeth to claw back rights.
- Checkmating debtors legal gymnastics and exploitation of legal technicalities to frustrate recovery.
- Fast tracking the hearing and determination of AMCON cases.
- Enhancing AMCON’s rights over collateral securing EBAs from securing interest to legal title.
- Fine-tuning AMCON special powers.
How Much Does Debt Collection Company Receive?
If a debt collection agency’s services are used by a creditor, the debt collection agency is paid a commission for collecting the debt. This commission normally ranges anywhere from twenty to fifty percent (20-50%) of the amount recovered depending on the difficulty of the collection case.
Some Early Definitions
Prior to the government including its meanings of words in the major consumer credit laws, the definitions of creditors and debtors were fairly straightforward. A person or company who loaned money or sold services or goods on credit was a “creditor” or a “credit grantor” and the person who borrowed money or purchased goods or services on credit was the “borrower” or “debtor.”
WHAT IS A DEBT?
The FDCPA limits its concern to consumer transactions by also defining a “debt” as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.”
The FDCPA definition of a “debt collector” essentially is any person who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. Based upon their own actions and some federal and state laws, it is very easy for someone collecting their own debts to be considered a “debt collector” as well. Therefore, all people who collect or attempt to collect debts for others or themselves would be well advised to comport themselves as though they were “debt collectors” controlled by the FDCPA and all other federal and state consumer credit collection laws.
Primary vs. Third Party Collectors
Debt collectors who attempt to collect their own debts are referred to as “primary” or “first party” debt collectors and the debt is referred to as “primary” or “first party” debt. In first party debt situations, the debt collector is also called the “credit grantor” or the “original or originating creditor.”
Debt collectors who collect debts for others are referred to as “third-party collectors” and the debt is referred to as “third party” debt. Third party collectors usually work on a “contingency basis,” which means that the third-party debt collector will only earn a commission if and when the collector is successful in actually collecting the debt.
Types of Receivables
Debt accounts are often referred to as “receivables.” Receivables are often divided into classes based on the amount of time that has passed since the accounts first became delinquent or on the number of times that collection activities have been attempted on them. The various classes are often referred to as primary, secondary, tertiary, or quaternary. Though the collections industry is slowly agreeing on universal descriptions of the classes of accounts, the terminology continues to be less than static. Nonetheless, one current classification of receivables is as follows:
• Primary debt is between six and twelve months past due and has usually only been collected upon by the original creditor and possibly one third-party debt collection agency.
• Secondary debt is twelve to twenty-four months past due and is being worked on by a second collection agency.
• Tertiary debt is more than thirty-six months past due and/or is being worked on by a third collection agency.
• Quaternary or warehoused debt is over forty-eight months past due and/or is being worked by a fourth or more collection agency.
Charged-off Accounts and the Secondary Debt Market
The word “secondary” is also used in another context. Instead of sending debts out to a debt collector on a third-party contingency basis, creditors will sometimes simply charge off accounts as being uncollectible by the company and sell their debts on what is called the secondary debt market.
Charging off and selling uncollectible accounts allows the credit grantor to obtain a certain and immediate return in an otherwise speculative situation. The amount of return is usually from two to ten cents on the dollar depending on the quality of the debt being traded. Properly done, the purchase and subsequent collection of charged off debt from the secondary debt market can be a very lucrative business. Not to mention the fact that it employs a lot of debt collectors.
Intentional vs. Unintentional Debt
Consumer debt is often classified as intentional or unintentional debt.
• “Intentional debt” is the majority of consumer debt and is intentionally incurred by consumers who want to enjoy the benefits of goods or services without having to pay for them completely in advance
• “Unintentional consumer debt” is a payment obligation that is forced upon consumers by unexpected adverse circumstances such as a sudden illness or a casualty to property like an uninsured car wreck or house fire.
It is important for debt collectors to recognize whether the accounts they are collecting are intentional debt or unintentional debt, because the approaches for these two types of debt are often quite different.
Secured vs. Unsecured Debt
Secured debt is created when the debtor grants the creditor a security interest in a particular asset as collateral to give the creditor some measure of guarantee that the debtor will repay the debt. The most common examples of secured debt are when a borrower grants a security interest in a house or a car to a lender in order to obtain a loan.
The vast majority of debt, however, is unsecured debt. The leading examples of unsecured debt are credit card debt, medical debt, and utility debt.
Delinquent secured debt is much easier to collect than unsecured debt. If a borrower fails to repay the loan, then the lender simply forecloses on its security interest in the collateral and takes and sells the collateral to repay the loan. If the value of the collateral is less than the outstanding balance on the loan, then the deficiency becomes unsecured debt.
Delinquent unsecured is more difficult to collect than secured debt, because the debtor has nothing to lose except the time and frustration that it takes to deal with his or her credit problems. Dealing with these problems may include putting up with collection calls, suffering harm to the debtor’s credit rating, and, in extreme cases, being a defendant in a debt-related lawsuit.
Secured debt is treated more favorably in bankruptcy proceeds than is unsecured debt. Secured creditors can usually recover the collateral for a loan out of a bankruptcy.
Unsecured creditors almost never receive more than pennies on the dollar in bankruptcy cases.
Section III: Why Consumers Avoid Paying Their Debts
Regardless of whether the debt a debtor is delinquent in paying is intentional or unintentional, delinquent debtors sometimes believe that they can simply get away with not paying their debts.
One reason that delinquent debtors may think they can get away with not paying their bills is that they think the system is rigged in their favor. Oftentimes they think that the cost-benefit ratio usually does not justify a Money Lender spending the time and money needed to pursue a debtor to where the debtor currently resides, to discover the debtor’s assets, to negotiate and monitor a repayment plan, and, if necessary, to enforce that payment agreement in court of competent jurisdiction.
One problem that prevents Lenders from enforcing their payment terms is that the “system” is rigged in the debtor’s favor. Pursuant to the Fair Debt Collection Practices Act, Lenders can only use limited civil means to collect debts, must first find “skipped” debtors, must then find and be willing to use some leverage to convince debtors to pay, and can only sue debtors in the debtors’ places of current residence.
SECTION IV: What Debt Collection Agencies and Collectors Can Do
The solution to convince a reluctant debtor to pay his or her just debts is for a debt collection agency to use efficiently its substantial resources to shift the cost-benefit ratio back toward the credit grantor’s/Lender’s favor. A collection agency can shift the cost-benefit ratio by creating a multi-disciplined network of debt collectors who can cost-effectively locate “skipped” debtors, contact them, negotiate a repayment plan, and sue a debtor who does not pay as agreed.
SECTION V: Debt Collection is Not Just a Job – It’s a Career
A key tool of an effective debt collection program is to use computers and other technology to manage and service a huge volume of cases using human resources only where they are actually needed. Another key tool to effective debt collection is to use a debt collector who is an effective negotiator. This combination of the right physical resources with the right human resources can lead to successful collections.
When using those human resources, however, the people must be well trained, well- motivated, well supported, well supervised and well compensated. In order to manage effectively and prevent the significant expense of employee turnover, debt collection agencies, debt collectors, and support personnel must all understand that they are working on a career path and not just a job – and that is where effective training begins.
SECTION VI: Participants in the Receivables Trading, Management, and Collections Industry – The Emerging New Model in Nigeria
The various participants in the receivables trading, management and collection industry including: –
o Credit grantors or originators or Lenders
o Debt purchasers
o Debt traders
o Debt portfolio managers
o Collection agencies
o Collection law firms
Debt collection has become a major part of an even larger industry that has at times been called the account receivables management (ARM) industry. This ARM industry is now expanding into what is more accurately described as the receivables trading, management, and collections (RTMC) industry.
The beginning of the receivables industry is so common and familiar that it almost goes without saying. Customers (also called “consumers” or “debtors”) buy goods or services using credit accounts and then either unintentionally fail or intentionally refuse to pay the credit accounts according to the agreed upon terms. The failure of the debtor to pay the credit account when due often requires the creditor to use a collection agency to recover the credit extended to the consumer.
The receivables trading, management and collections RTMC business is a relatively recent expansion of the accounts receivables management (“ARM”) industry. Whereas ARM has historically concerned itself primarily with the actual collection of delinquent accounts, the RTMC business has expanded into three separate areas of related business:
The three segments of the RTMC business are:
• The purchase and sale of debt portfolios
• The management of the purchase and sale and collection of debt portfolios
• The actual collection of debt portfolios
The concept and practice of buying and selling receivables is not new.
Credit originators comprise many market segments including, but not limited to, the following businesses:
• Credit cards issued by banks and credit card companies under the Visa, Mastercard, Discover, American Express and other major labels
• Private label credit cards
• Healthcare providers
• Student financial aid
• Automobile loans
• Traditional consumer loans
• Mortgage loans
• Business and commercial loans
• Standard performing and non-performing loans
• Consumer financing
• Sub-prime lending
• Non-sufficient funds returned checks
• Judgment creditors
Traditionally, credit originators sent delinquent accounts receivable to a collection agency. Rather than send marginally collectible accounts to an outside collection agency, however, some credit originators have now expanded their in-house collection staffs to squeeze the last nickel out of as many accounts as possible until they finally give up and charge off the last uncollectible accounts to profit and loss. Accounts that have been charged off to profit and loss are often referred to as charged off receivables. These charged off accounts are sometimes, but not always, grouped into charged-off receivable account portfolios and sold for pennies on the dollar of their face amounts. Other times, originating creditors continue to attempt to collect their charged off receivables or simply allow them to remain uncollected forever.
Debt Purchasers, Debt Traders, and Portfolio Managers
The transformation of credit originators into debt sellers naturally brought with it the emergence of debt purchasers. Some debt portfolios are sold and resold several times. Of course, wherever sellers and buyers are creating a market in something, traders have to insert themselves as middlemen entitled to a slice of the profits. Pure debt traders never attempt to collect on the accounts that they buy and sell.
The creation of a trading marketplace for charged-off receivables, however, has led to the further creation of another segment of the industry, which is the management of charged-off receivables account portfolios. Portfolio managers earn a fee from investors to oversee the buying, selling and, oftentimes, forwarding to collection agencies of some or all of a particular portfolio.
In a vertical integration of the RTMC industry, established third-party collection agencies have become some of the largest purchasers of charged off receivable accounts portfolios. In a mirror image of this trend, many new receivable purchasers are establishing captive debt collection agencies in the hopes of using economies of scale and technology to capture the traditional agency’s profit margin for their own benefit.
Collection agencies may vary in the types of services they provide. The full scope of services may include:
• First party collections – Also known as “early-outs,” “extended business
office services” or a variety of other names, first party collections involve servicing accounts in the name of the creditor
• Third party collections – The traditional collection services that most people associate with collection agencies involve the placement of accounts with the collection agency, which are then collected by the collection agency as the agent for the creditor in exchange for a percentage of the amounts collected.
• Skip tracing – Intensive debtor location services
• Debt purchasing – The buying of delinquent accounts for collection in the
name of the subsequent owner, which may be an agency purchasing debt for its own benefit.
• Bankruptcy management – A particular specialty of collection services for creditors of debtors who have filed bankruptcy.
Collection Law Firms
No discussion of the participants in the RTMC industry would be complete without discussing the smallest, but possibly fastest growing, segment of the industry, the collections law firm. Collections law firms have the unique ability to make the ultimate attempt to collect an account by filing a collections lawsuit.
Depending on the type of debt being collected, the collections lawsuit may be filed as a matter of course early in the process or as a last resort after all other attempts to contact and negotiate with a debtor have been exhausted.
Most collections law firms have historically been fully independent and serviced a variety of creditor and collection agency clients. Some large high-volume creditors and collections agencies, however, have now vertically integrated their operations by developing captive single-client collections law firms that exclusively service the creditor’s or collection agency’s particular needs. In addition, some collections law firms have vertically integrated their operations by purchasing and servicing debt portfolios.
Technology Vendors and Service Providers
As with any type of business, the growth of RTMC industry has fostered the development of a large retinue of technology vendors and service providers whose purposes are to make a profit helping various RTMC participants run their individual businesses more effectively and efficiently. These vendors and service providers include the following technologies and services:
• Collection software systems
• Consumer/credit reporting agencies/bureaus
• Personal information databases
• Telephony providers
• Call broadcasting providers
• Various types of consultants
SECTION VII: The Debt Collection Process
In this section of the course, you will:
• Discover the general debt collection process in varying levels of detail
• Explore the requirements for an initial communication with a consumer
• Learn the importance and rules concerning an initial verification period
• Briefly discuss the initial collection call
• Learn the structure of a generic collection agency
The debt collections process may seem to the uninitiated to be very simple. Obtain a portfolio of accounts from a client; contact the consumers and collect the amounts due; and remit the collection proceeds back to the client minus the commissions.
Collections To Client
The devil always being in the details, however, a lot of things can happen during this “simple” process.
The collections effort required to convince a consumer to make good on a charged-off receivable account may be as simple as contacting the debtor once through a single reminder letter or reminder phone call or it may become as complex as placing the charged-off receivable account with a series of collection agencies and ultimately with a collections law firm in order to obtain and execute on a judgment. Each step along a full-blown collection process may have many possibilities, which may lead to a very convoluted path from placement to collection.
For example, the simplest middle step of contacting the debtor and collecting the account may be as little as sending the first collection notice for the account being placed with the agency, which may elicit a payment. On the other hand, the debtor may ignore the first notice, in which case the collection agency may have to resort to an initial collection call. If the initial collection call does not result in a payment, then the creditor may have to sue the consumer.
While this may also seem like a relatively simple scheme, one must appreciate that some level of detail and expertise is required to complete even the first or second steps of these limited processes. For example, depending on the aggressiveness of the collection campaign, the collector may quietly wait for a certain period of time between mailing the first notice and making the initial collection call. In addition, to be both legally compliant and effective, both the first collection notice and the initial collection call must contain several particular pieces of information. Furthermore, the initial collection call will usually have several requisite steps.
The Initial Communication with the Consumer
Explaining the complexity of these initial steps a little more completely requires knowing that the collections industry is a very heavily regulated business and that the most significant law regulating it is the Fair Debt Collections Practices Act, which is often abbreviated as the FDCPA. We will study the FDCPA in extraordinary detail later. In the meantime, it is sufficient to know now that Section 809(a) of the FDCPA requires an initial communication about a debt to contain:
(1) the amount of the debt;
(2) the name of the creditor to whom the debt is owed;
(3) a statement that unless the consumer, within thirty days of receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector,
(4) a statement that if the debtor notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the debtor and a copy of such verification or judgment will be mailed to the debtor by the debt collector; and
(5) a statement that, upon the debtor’s written request within the thirty-day period, the debt collector will provide the debtor with the name and address of the original creditor, if different from the current creditor.
DELINQUENCY means that you are behind on payments. Once you are delinquent for a certain period of time, your lender will declare the loan to be in default. The entire loan will be due at that time. Having a record of delinquent accounts can significantly increase interest rate that a consumer receives on any future loans. It might also make it harder to be approved for a credit card, apartment.
PLEASE NOTE: “DEBTS DO NOT DIE, IT LIVES UNTIL IT IS PAID OR FORGIVEN”
Definition of Terms/Acronyms
• Amendment: A minor change or addition designed to improve a text, piece of legislation, etc.“an amendment to existing bail laws”
• AMCON –Asset Management Corporation of Nigeria
• EBA – Eligible Bank Assets
• EFI – Eligible Financial Institution
• CBN – Central Bank of Nigeria
• FDCPA – Fair Debts Collection Protection Act