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Saturday, September 27, 2008

Identifying Risk

I've been skip tracing my whole life.

I think most decent skip tracers have.

I didn't realize it until I was 21 years old and working for Chrysler Credit as a collector.

I'd been hired as a field rep, but that type of work was closer to the shenanigans I used to pull as a kid growing up in the suburbs of Chicago. I never stole a car or anything like that, but my buddies and I were pretty mischievous and we did some crazy things when we did sleep outs in the summer. When I realized that my new job involved dressing in black and taking someone's car in the middle of the night, it wasn't too far off my radar screen.

When I got moved inside, I quickly realized that being a field rep was pretty easy because I usually knew where the cars were at, so all I had to do was take them.

Finding the cars proved to be a different challenge.

Each collector had a group of dealerships they represented -meaning that everyone who financed a car for that dealership was in my queue. Fortunately, 90% of the people paid as agreed and I never had to pull their files out of the drawer. Of the 10% who didn't, we usually got that down to between a quarter and a half a percent by their 30th day of delinquency. The month before I got promoted to be a collection supervisor, I kept my queue at zero delinquency for thirty straight days. It was a big deal to "Zero Out" for the day, meaning that no one in your queue with that due date went over thirty days late on that day. Doing it for a few days in a row was hard work, but once I'd developed a plan to identify my riskiest accounts, it really wasn't that big a deal to "Zero out" every day.

Identifying the risk of your queue as a collector is the name of the game.

My territory was Reno, and my "more challenging" customers were involved in the gaming and prostitution industries. I knew some of them from when I was a field rep working their accounts and collecting their payments in the field. Our field reps were like a pick up service. The collector didn't accept a promise to pay, they made an arrangement to have the customers payment picked up. By knowing my customers, I knew who would push me to the 29th day, so I started collecting their accounts when I received their last months payment. Besides being a collector, I was on a first name basis with my regular customers and many times I would have to dig deep into their financial situation to make sure I would get my payment each month.

Nowadays, I think most collectors know their customers about as well as we know the skip accounts we are assigned; not at all, or at least not on a monthly "Hi, how ya doin Mike, hows the job going? Did your daughter have her baby? BTW, when do you think you can get that payment to me as I noticed I didn't get your check as we agreed I would last week".

When field reps were eliminated in the mid 80s, controlling delinquency became more challenging. In the late 80s, when the personal touch went by the wayside to computers, growth, sub prime financing and collectors changing jobs like pro athletes changing teams, it suddenly became more challenging to collect car payments. Using skip tracing companies was almost unheard of when I started SKIPBUSTERS out of my apartment in San Gabriel with my wife in 1988. Now, its becoming a more common tool as collection departments identify risk and realize they need help in resolving the more difficult accounts they have not made progress on.

Identifying Risk. It's still the key to understanding, managing and controlling a queue, a portfolio, or even when broken down to one account. In fact, it should be broken down to one account.

These days, when a customer goes delinquent and you can't find them, you have a number of on line resources you can chose from to develop leads to call to locate your customer. Unfortunately, this information is not perfect, and what's even more unfortunate, is that many collectors will run a credit bureau or a public records report and they'll see an address they didn't have, and without verifying if its good or not, they'll "Shotgun" it out to a repo agency to have them check the address. What's worse is some inexperienced collectors will send out multiple addresses to the repo agent, making their job more difficult because it costs money to check all these addresses. To further complicate the problem, when the car doesn't show, then they'll ask the agent to "Kick it in", make contact, or more directly, do the skip tracing the finance company should be doing on the phone, or hiring someone to do if they are not capable of doing it, or don't have the time or resources to do it themselves.

They've identified the risk, but they've tried to resolve it with a step that delays the job that needs to be done, rolling up your sleeves and finding the customer, and the collateral. I think the main reason they do this is because they don't know how to really skip trace, or they are so overwhelmed with volume that they don't have the time. I also know first hand that while many of the tools available to find the leads are helpful, the sheer volume of this information can also be overwhelming, causing it to not be used properly for its ultimate purpose, to find the lost customer and the collateral.

Risk on an auto loan is identified by a variety of factors:

Balance of the loan
Perceived value of the collateral
Age of the loan
Payment history
Credit History and a sudden change
The quantity and quality of all available leads that can be used to skip trace

Once you identify the risk of an account, you must allow that file the time it needs to be worked to be resolved in a positive manner. It always amazed me that a company would charge off millions or billions in full balance skip charge off losses, but when it came time to drill down and see how they could reduce losses, the obvious solutions seemed to go by the wayside.

A good skip tracing company can give you an outside benchmark to where your staff is in terms of your ROI with each employee. Let me give you an example. After you throw in facility fees, employee benefits and misc. overhead, lets say your cost per collector hour worked is $35. I think this is a pretty low number when you really add everything in, but we'll go with it. Then lets say that collector is working a queue of 100 charged off accounts at an average charge off rate of $18K, for a total queue size, in dollars, of $1.8m. Lets say they locate and recover 25% of their files each month, and the average car they recover brings in $10K at auction. You just spent $6066 in wages to recover $250K. Not a bad ROI.

If you gave a skip trace company a like group of 100 files and your cost to them was an average locate fee of $400, if they got you the same 25%, then your cost would $10K, which is not a good deal for you if both sides get you 25%. Now lets say the skip company gets you 35%. Your cost would increase to $14K, but your recoveries would increase by an extra 10 cars, or $100K if your getting $10K per car at auction. Now you've spent $14K to recover $350K, versus doing it in house at $6066 to recover $250K. You also don't have the burden of the extra employee, and you made an extra $92K. If the skip company can get you 40% or better, then you are really ahead of the game.

Besides the numbers, what you've also gained is an invaluable resource, a work in progress monthly benchmarking challenge to your staff to raise the bar. By collaborating with your skip vendor through regular meetings and constant communication and measurement of the numbers, down to a granular level, you now can forge ahead with a relationship with your skip vendor to improve your numbers and theirs, making it a win-win for both sides.

and when I was hired to