Value Management Group International, LLC : Collections & Recovery Performance Improvement...

Value Management Group International, LLC:

Collections & Recovery Performance Improvement Opportunities and Best Practices

January 27, 2003

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Confidential for Internal Use Only

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Agenda

• Overview of Value Management Group International LLC (“VMGI”)

• Significant Opportunities through Improved Collections and Recovery Performance

• VMGI’s Collections & Recovery Performance Improvement Qualifications

• Case Studies

• Best and Promising Practices

– Collections Productivity Drivers

– Performance Measurement and Management

– Repossession and Bankruptcy Management

– Lease Fee Recovery

• VMGI Contact Information

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Value Management Group International, LLC (“VMGI”)

• We assist consumer lenders in the realization of performance improvement through superior strategy, operations management, and financial management

• VMGI possesses the requisite experience and skills needed to be successful…those skills include:

– Strong analytical competence– Broad exposure to front and back office environments– The right balance between creativity and practicality– Deep industry insights and knowledge

• VMGI has experience in many different kinds of projects with card issuers such as:* Operational Performance Improvement * Strategy Development and Implementation

* System Conversion Assistance * Vendor Services Review

* Budget Management * Competitive Assessments

* Contract Negotiations * Revenue Enhancement

• VMGI personnel have assisted a number of consumer lenders in the identification and realization of Collections & Recovery performance improvement opportunities

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Significant Opportunities through Improved Collections and Recovery Performance

• Asset quality deterioration remains a key issue for consumer lenders due to a combination of macroeconomic forces as well as an oversupply of consumer credit

• This deterioration has caused relatively high levels of delinquency, charge-off, and bankruptcy

• While collections and recovery has traditionally been a very critical cornerstone to any successful consumer lending effort, the relative importance of strong collections and recovery efforts has increased dramatically

• In spite of the importance of collections and recovery, many organizations possess significant untapped performance improvement opportunities due to a variety of factors, such as:

– Multiple and under-integrated systems (Source, Collections, Recovery, Dialers, etc.)– Multiple vendor relationships (Systems, Attorneys, Agencies, Skip Trace, Check-by-Phone, etc.)– Product silos which does not enable overall customer management and collections functionality– Ineffective processes and procedures– Underutilization of the power of effective performance metric analyses– Underutilization of effective preventative measures (pre-collections customer management)– Underutilization of collections and recovery technology

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Significant Opportunities through Improved Collections and Recovery Performance

The potential benefits from improved collections & recovery efforts are significant

• Scenario #1: Lower Costs through Effective Resource Utilization– Assume 225 accounts per collector with relatively low intensity due to underutilization of queue management, sub

optimal dialer campaign management, underutilized management reporting, etc.

– Assume a 300 collector organization with an average total cost per collector of $35,000 per year

– Simultaneously increase accounts per collector to 275 while maintaining or increasing account-level collections effectiveness through addressing specific improvement areas

– Reduces the need for approximately 55 collectors for a total recurring annual cost save of $1.9 million

• Scenario #2: Reduce Charge Offs through Effective Collections– Assume a $2 billion managed consumer portfolio with contractual charge-off rates of 2.5%, or $50 million per year

– Assume that 20 basis points of charge offs is due to any combination of ineffective collection techniques, sub optimal skip trace efforts, ineffective resource allocations, sub optimal processes, etc.

– A 20 basis point reduction in contractual charge offs provides an annual financial benefit of $4 million

• Scenario #3: Increase Liquidation Streams for Charge-Off Accounts– Assume a $2 billion managed consumer portfolio with contractual charge-off rates of 2.5%, or $50 million per year

– Assume a 2.0% increase in netback due to any combination of renegotiated fee structure, increased effort /intensity from the vendors, etc.

– A 200 basis point increase in contractual charge off netback provides an annual financial benefit of $1 million

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VMGI’s Collections & Recovery Performance Improvement Qualifications

• VMGI possesses deep experience in the critical aspects of Collections & Recovery– Our knowledge base covers the end-to-end collections & recovery process

• Our experience resides in a number of consumer credit products– Credit card

– Auto (Loans and Lease, Direct and Indirect)

– Education Finance

– Installment

• We possess extensive knowledge of point solutions such as:– System platforms

– Risk scoring

– Skip trace

– Check-by-phone

– Debt buyers

– Agencies

– Attorney networks

• VMGI is independent of point solution vendors, thus allowing for unbiased and completely objective analysis

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Case Study #1: Review of Collections Strategies and Practices • For a leading non-government guaranteed student lender, VMGI led the reorganization of

the overall collection effort over a two month period• Key activities and project benefits included:

– Physical, technological and quantitative review of four internal collection sites and two third party agency relationships– Assessed internal readiness to move collections activities in-house with respect to:

• Go forward system platforms• Capacity• Training• Collector skill levels• Workflow management• Management reporting• Dialer management• Skip trace• Risk scoring and treatment strategies• Letter campaign management

– Developed an integrated skip trace effort for the entire portfolio– Developed integrated training and collections policies and procedures– Developed an integrated letter strategy– Developed ongoing agency and internal performance assessment methodologies– Developed a consolidated collections capacity plan

• The expected opportunity in reduced annual charge offs was estimated to be approximately $10 million

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Case Study #2: Review of Consumer Credit Recovery Management Activities

• For a leading auto and education consumer credit provider, VMGI performed a comprehensive evaluation with the objective to improve overall recovery management

practices, lower operating costs, and maximize loss recovery

• Key activities and project benefits included:– Perform a detailed batch track analysis of recovery cash flows by product, charge-off reason, and source

– Assessed the following

• Organization structure

• Potential benefit of forward flow and point-in-time asset sales

• Internal and third party performance and overall recovery effort

• Skip trace

• Collector skill levels

• Risk scoring of charge-off accounts

• Lease fee recovery process

• Management reporting

• The expected annual cumulative potential opportunity was estimated to be between $3 million and $5 million

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Case Study #3: Recovery Operations Review

• For a leading card issuing bank, VMGI was tasked with performing a comprehensive analysis of how to improve the Recovery function’s cost and liquidation performance through improvements in organization structure, processes, vendor relationships, systems, and management reporting. Our analysis included the following:

– Analyzed financial performance data and identified opportunities to improve cost performance

– Organization structure for the overall Recovery Function

– Review of contracts and proposals with/from third party vendors

– Review of skip trace options

– Review of recovery batch tracks to match and evaluate recovery cash flows to drivers such as:

• Forward flow buyers (contractual and bankruptcy)

• In-house recovery

• Agencies

• Attorneys

• Third party purchasers of charged-off debt

• The expected opportunity was estimated to include $1.4 million in annual, recurring cost improvement opportunities and increased annual liquidations of $3 million

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Best and Promising Practices-Collections Productivity Drivers -Preventative Measures• Update of customer information while the account is current

– Confirm during customer service interaction

• Phone reps

• Internet banking

• Branches

– Confirm all liable parties, not just the individual that is in contact with the Credit Grantor

– Confirm and obtain valid employer information

– Account for area code splits to prevent mis-dials

– Ensure return mail processing is linked to both the source system and collections system

• Require source system and collection system vendors to periodically train the Credit Grantor on system enhancements and improved information transference across platforms/systems:

– Build into any new contracts and vendor reviews

• Increase links and information access across the Credit Grantors’ franchise to the extent possible given the contract with your customer

– Customer contact information

– Customer balances available for offset if needed

• Sell direct debit

• Ensure your delinquency-related fees are fully priced relatively to competing lenders

• Instill into your collections practices the need for Credit Grantor to help customers succeed financially

– Determine as soon as possible why the customer is not honoring their agreement with Credit Grantor

– Carefully assist the customer in addressing the issue

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Best and Promising Practices-Collections Productivity Drivers-Technology and Process Items

• On-line credit bureau access

• Integrated electronic check by phone functionality

• Electronic access to all pertinent loan documentation

• Eliminate letters that are “stale” to prevent legal issues…don’t give collectors an opportunity to send a risky letter because it is still on the menu

• Collectors should make an outbound call within 48 hours of assignment

• Have full access to co-borrower information

• On-line payment method– Make it easy to pay via your website– Encourage customers to pay electronically while on-line

• Effective predictive dial utilization– Often utilized more to produce outbound call attempts/high penetration vs. analyze/refine best time to call

• Skills-based routing of calls– Language-based– Senior vs. junior collectors

• Risk based segmentation– Usage is increasing– New vendors coming to market with artificial intelligence-based offerings

• Proliferation of relatively low cost skip databases have sprung up as a result of broad internet usage

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Best and Promising Practices-Performance Measurement and Management

High Level Performance Metrics-The Basics The Next Level• Dollars collected by bucket and per collector

• File penetration rates

• Number of attempts, contacts, and right party contacts

• Promises obtained

• Promises kept

• Time on System vs. total time

• Delinquent accounts cured

• Average payment size

• Roll rates

• Staff turnover

• Overtime/regular hours

• Cost per account by delinquency bucket

• Skip trace• Accurate and consistent definition and application of skip account status

• Average time invested per skip

• Number of finds/skips

• Average cost per attempt

• Average cost per find

• Root cause analysis of skip (documentation deficiencies, ineffective contact information validation in last known talk-off, etc.)

• Loan Modifications• % of modified loans going 30+ DPD within 60, 90, 180 and 360 days of modification)

• % of delinquent accounts modified each month

• Cost per modification

• Fees collected per modification

– Direct Debit Sales

– Check-By-Phone Sales

– Number of Account Information Corrections

– Cure vs. Non-cure Payments

– Average Talk Times

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Best and Promising Practices-Performance Measurement and Management

• There is a need for effectively segregated batch track management reporting to be integrated into the daily management of collections and recovery performance– Batch tracking by month of placement and segregated by product and collection entity (In-house,

agencies, etc.)

– Sample batch track flows captured– Collector: Track cash flows related to month of placement

– Bankruptcy Collectors: Track cash flows related to month of placement

– Agencies: Track cash flows related to month of placement and by product:

• Ex.) Dollars from XYZ Recovery Agency for Credit Grantor Leases placed during April, 2002

– This information is required to perform ongoing sell vs. own analysis

• VMGI believes that the primary performance metric for Collectors should be dollars collected, with the caveat that work effort performance (calls placed, right party contacts, promises) should be captured and analyzed on a daily basis

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Best and Promising Practices-Performance Measurement and Management of Agencies• A comprehensive review of agency performance can provide significant value

– 1% increase in netback on $100 million in placements equals $1 million

• A formalized communication process between the Credit Grantor and the agencies is needed in terms of:

– Performance expectations

– Performance relative to peers

– Forecast of future placements in relation to expected performance

– Sharing of best practice ideas

– Changes in perceived collectability of paper

• Standard Agency expectations include:

– Work effort, defined as outbound call attempts, begin within 24 hours of electronic assignment (provided all legal requirements have been met)

– Daily attempts to all possible numbers for the first 5 days

– Thereafter, phone attempts at least every other day

– Weekend and evening attempts will take place throughout placement period

– Attempts to validate numbers will take place after three no answers

– Accounts with invalid phone numbers will be skip traced at least every 7 days

– Promise to pays: follow up on the day that payment is due

– Broken promises: follow up daily for three days

– Bankrupt, deceased, fraud accounts are to be appropriately statused and returned immediately

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Best and Promising Practices-Bankruptcy and Repossession Management

• Define and consistently apply variables used to determine whether to repossess a vehicle, settle the account, or continue (or amend) a payment plan, such as:

– Clearly understanding variables used to determine the estimated value of a vehicle

• Blue book value, and how to apply a range of values

• Manheim value and its use in estimating vehicle value

• Poor condition value reduction and ways to determine condition

• Historical % of blue book received at auction, information sharing between processes

• Vehicle location

• Discussions with Customer or Attorney and what impact, if any, these should have on the estimated vehicle value

• Need for an Agent to review the vehicle condition and appropriate valuation adjustment

– Common understanding of estimated repossession costs

• Repossession

• Transportation

• Storage

• Reconditioning

• Auction

• Legal

– Past payment and customer behavior

• Need to define relevant behavior variables

– Appropriate level of effort that an Adjustor should perform with respect to a comparison of expected cash flows under repossession, settle, or payment plan scenarios

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• Settlement offer strategies– Full amount owed, percentage of full amount, relative to other variables, etc.– Criteria to consider– When Manager approval should be gained

• Clearly define procedures for how often to follow-up with attorneys and/or customers– Timing of intention Letter– Timing of initial follow-up if no response to the intention letter– Timing of subsequent follow-up to the intention letter– Other scenarios of attorney contact– Customer follow-up regarding vehicle intentions after discharge

• Appropriate time/waiting period limit and number limit/tolerance when determining next steps to be taken, as well as letters vs. outbound calls

– Missed payments– Broken promises– No return on telephone messages– Skip trace effort

• Timeframes presented to customers to make a payment or settlement, and follow-up actions– Settlement payment– Late recurring payment

• Determination criteria for calculating minimum payment amounts if trying to keep a customer in the vehicle

– More than regular payment, less than regular payment, timing of offers, etc.– Value of unit– Cost of repossession/sale– Net chargeoff balance– Full balance– Past payment behavior

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• Criteria for when to object to a Chapter 13 plan

– Value of vehicle

– Interest rate

• Determine criteria of when to pursue a non-bankrupt cosigner

• Define timeframe on days to confirmation (Ch 13) or days to discharge (Ch 7) after which it is deemed not cost effective to send a Motion or a Stipulation

• Common definition and consistent use of system status codes

• Appropriate hierarchy of system status codes

• Workflow management and prioritization utilizing system-driven schedule vs. manual (paper-based) tools

• Utilization of Support personnel

– Primary tasks that Support personnel should perform

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• Development of a simple collection/recovery formula to determine the estimated net recovery of a repossessed vehicle

– Should be based on actual historical comparisons of estimated Blue Book (low end) and Manheim vehicle values and receipts from auction

– Any general “rules of thumb” should be tested against historical data from the used Recovery information system

• Manheim

– Manheim should be used for estimating the value of a vehicle. This estimate will be closer to the actual dollar amount recovered than Kelley Blue Book and can be used in conjunction with historical auction costs to more accurately determine recovery dollars

• Kelley Blue Book

– When not using Manheim, the lowest value of Kelley Blue Book (after adjustments for mileage, condition, etc) should be used for estimating the value of a vehicle

– The highest value of Kelley Blue Book should be used for negotiating the value of the vehicle in a Chapter 13 payment plan and in consideration of opening offers in potential settlements with borrowers

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• Processing rules addressing timeframes for adjustors to:

– Initially review an account and take first actions

– Determine the intention of a bankrupt borrower

– Send appropriate letters to attorneys, court, borrower, etc

– Recovering dollars after a settlement has been reached

– React to missed payments or broken promises by borrowers

– Reviewing and following up on open accounts based on appropriate (and consistently used) status codes

– Proceed with repo procedures after missed payments/broken promises

– Correctly identifying and performing skip tracing

– Appropriately filing Motions for Relief from Stay

• Systems

– Correct utilization of system resources can streamline collection efforts and help managers ensure opportunities do not fall through the cracks

– Adjustors should all understand system status codes and use them appropriately allowing better systems to present daily workload, prioritize tasks, and enable a team environment

• Long range status reminders using number of days and not meaningful definitions should be avoided

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• Understanding costs– There can often be a disconnect between repossession, legal, and collections

personnel. Adjustors need current and accurate estimates on repossession, auction, and legal costs to make informed decisions. These costs include:

• Repossession

• Transportation

• Storage

• Reconditioning

• Auction

• Repossession Legal

• Filing Motions and Stipulations

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Best and Promising Practices-Lease Fee Recovery

Typical End of term lease fees include:– Termination fee, plus pro-rata fees due from late termination

– Costs related to moving the vehicle if returned to an incorrect location

– Excess mileage charges

– Wear and tear charges

– Official fees and sales/use taxes in connection with lease termination

– Personal property taxes due with respect to the vehicle

– Accrued late charges

There may be several improvement opportunities, both in terms of customer management and increased dollars collected/recovered, relative to the lease fee recovery process– Improved customer communications and management as the lease is about to expire

– Improved property tax estimation and billing

– Increased integration of the end-to-end lease fee process

– Development of work standards

– Development of a data repository to track customer disputes

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VMGI Contact Information

VMGI Contact

• Scott Smith, Executive Director, VMGI

P.O. Box 406

Chesterfield, MO 63006-0406

Phone: 314 409-2476

Email: [email protected]

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