Recovery Industry History
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THE INDUSTRY’S BEGINNINGS

During the 1960s and early 70s, carmakers were selling an average of 10 million cars and light trucks per year.  Historically, financing required a minimum of 20% down which provided the buyer with equity in the vehicle.  The lending criteria used for approving car loans usually eliminated poor credit risks.  Because of the strict financing requirements, not many repossession assignments were issued by lending institutions. 

If repossession was required, the vehicle usually had enough equity for the lender to recover the balance due.  Therefore, adding a recovery fee of $50 ($265.50 in today’s dollars) to the loan was not a problem since the expense could be recouped. Repossessions were assigned based upon contacts and relationships the lender had with a local company, usually a customer, who had experience with cars or trucks.  There were few, if any, companies specializing in collateral recovery.  The entire repossession business was based upon the personal relationship between the lender and recovery person, with the lender assuming any risk associated with the repo.

There were no fixed-fee contracts for recovery services and pricing was based upon the difficulty of the repossession, the time involved and the miles traveled.    Repossessed vehicles were usually driven away using keys or hot-wiring. With the limited number of recovery people available, financial institutions relied on relationships among the recovery agents for contacts in new territories.  Sometimes, the repossessor will traveled the entire state locating and recovering collateral, which was then driven back to the lien holder.  With the limited number of repossessions occurring and few repossession companies, the recovery activity was truly a niche business.

There were no laws, neither state nor federal, that regulated the activities of repossessor, and no insurance was available or required.  Florida, one of the first states to institute regulations, did not have laws until 1974.  Because of the lack of legislative oversight and insurance there were virtually no law suits involving repossessions.  People were less litigious in those days, filing suit would mean that your neighbors would know you had a car repossessed and courts had not yet held the creditor liable for the acts of the repossessor they hired; therefore no readily available ‘deep pockets’ to pay damages. 

During the late 1970s more businesses dedicated to collateral recovery opened up and most of these had tow trucks and storage facilities.  Daily storage fees began to be charged and collected.  Wheel lift tow trucks were rare, with most trucks equipped with hidden lifts such as the Illusion and Stow Away.  Gasoline had increased to just over $1.00 per gallon and diesel fuel was still less than $1.00. 

Sales of foreign-made vehicles surpassed the 2 million annual sales mark in 1977.  Domestic car and truck sales topped 12 million and US manufacturers were looking for ways to compete with the foreign manufacturers.  One competitive tool, as will be discussed later, was financing.

THE INSURANCE EVOLUTION

One reason lenders utilized people they knew for repossessions was because the lender covered the repo under their insurance.  If anything went wrong, the lender was responsible for the damage and costs.  The only insurance available to the recovery agent during the 1970s was a limited liability policy for American Lenders Service Company franchise owners.  However, this policy did not offer the comprehensive coverage(s) provided today.

In the early 1990's, Cigna Insurance, with the assistance of several recovery agency owners, developed the first comprehensive policy covering the special risks associated with the collateral recovery profession.  Subsequently, more insurers began to look at the recovery industry as a profit center, and more companies began offering policies.  Expansion of coverage from just liability in the 1970's to tow trucks, garage liability, personal property, on-hook, storage lots and wrongful repo created a significant premium dollar for the insurers.  There was virtually no claims history for this new line of business, but it appeared profitable based upon the initial actuarial projections. 

The combination of mergers and consolidation within the banking and lending industry and the advent of technology (faxes, computers, the internet) removed the personal contact structures which had driven the business for so long.  Newly hired collectors began making decisions regarding who received work based on different criteria than was used before.  With all the agencies vying for work, insurance coverage became a primary tool in the selection of a recovery vendor due to the reduction in risk to the lender.

Creditor collection departments are "cost centers", not "profit centers" and so creditors continuously look for new ways to reduce costs associated with collections.  With the cost of these new, comprehensive insurance coverages being absorbed by the recovery agency lending institutions immediately realized, as a good business practice, they could now look "outside" their operation for additional ways to reduce their collection expenses.

Unfortunately, the lack of experience with insurance coverage possessed by most collection departments meant anyone presenting an Acord Certificate of Insurance was deemed properly ‘insured’ for performing recovery work.  The assumption was that the insurer would not have taken the risk of insuring the company if it were not experienced and competent in performing repossessions.   Under this assumption by many lenders, most repossession agencies appeared to have adequate insurance when in fact they did not.   The collector reviewing qualifications did not know that in many instances the $1,000,000 general liability policy indicated on the Acord Certificate did not cover wrongful repo, specifically excluded repossession activities or did not cover repossessed collateral of others.  

THE EFFECTS OF EASY FINANCING

In the 1990s the financing landscape was changing rapidly with the proliferation of “sub-prime” lenders, no money down loans, 0% financing and terms exceeding 48 months.  The ability of less creditworthy purchasers to obtain financing led to an immediate need for more recovery businesses to keep up with the increased demand for repossessions.  To meet the increasing lenders demand, a proliferation of untrained, unqualified individuals and wrecker companies began to advertise repossession services.  Except for Florida and California where strict licensing laws are enforced, entry into the repossession business in almost all other parts of the country is virtually effortless.  Anyone who could qualify to buy a tow truck (and most could, even with bad credit), or owned a tow truck and had general liability insurance began to offer their “services”.   

Because these companies failed to maintain the proper recovery insurance, provided no training to agents, used inferior equipment, had improper storage for collateral and personal property and other deficiencies, their cost structure allowed them to perform recovery work at below-market prices.  These companies also took advantage of clients by falsifying information and not performing the work needed to resolve an account.  The worst that could happen was the client would pull the account, but the agent would still get a close fee.  If the client caught on, the unprofessional repossessor just moved on to the next client by offering low priced services.  This type of activity led clients to require regular updates on accounts.  Furthermore, abuse of close fees by unscrupulous agencies was one of the things that led lenders toward contingent assignments. 

According to AAA and Ward’s Automotive, the average new car sticker price is over $30,000, and the net consumer price averages $25,500 with discounts and incentives.  An easing of financing rules allowed more people to ‘qualify’ for a larger loan or 100% financing.  The result of the change in the way lenders granted loans caused the average deficiency balance on recovered collateral to climb significantly.   The lenders needed to reduce those deficiency balances and did so by cutting the costs associated with recovering and remarketing the collateral.  The increased supply of companies and individuals advertising repossession services allowed lenders to reduce cost by shopping for cheaper fees.  Assuming all recovery agents are equal, collectors played one agency against another to get cheap prices and take more risks.  As work filtered to the cheaply priced inexperienced agencies, the professionals agreed to take lower fees in order to meet their ever increasing cost of doing business.   

CONTINGENCY

There are professions where contingent fee arrangements have been the norm for decades.  Insurance, real estate and the legal profession come to mind.  In these instances, though, although the actual percentage rates have not changed much over the years, the value of the item on which the fee is based has increased.  Housing prices, insurance premiums and damage awards have all risen over the years.  Therefore, the fee, as a percentage, has increased as well.  In all these professions, the work product remains the property of the provider until the work is completed successfully.  In the legal community, contingent fees are a percentage of the recovery for the client and generally yield more than standard rates.  Attorneys who risk their time and money expect a bigger return if they are successful in solving the client’s problem.    

Due to inaction by the repossession community and a desire by the lenders to avoid paying close fees for poorly worked accounts, the majority of the major lending institutions are moving toward all contingent assignments.  This is a topic worth exploring because of how contingency has been implemented and interpreted for the recovery industry, and the detrimental effects it can have.

Over the past few years, the collateral recovery industry has redefined the term ‘contingency’ or ‘contingent assignment’.  Historically, a contingent assignment was handled similar to the real estate, insurance and legal communities.  Minimal information was provided to the lender and no payment was made unless the collateral was recovered.  Because the recovery agency was accepting the possibility of not getting paid for the additional effort expended, contingent assignments paid more than non-contingent work.  If the client received information, the agent was reimbursed for specific out of pocket expenses incurred in their search for the collateral.  A percentage of the collateral value or higher base fees and the ability to pass on out of pocket expenses to third parties made contingency work viable for the repossessor. 

For example, assume 10 assignments with a 60% recovery rate, $450 contingent fee, $325 non-contingent fee and $125 close fee.   If all assignments were contingent, the total revenue would be $2700 while the non-contingent would be $2450 ($1950 for recoveries and $500 for closes).  Given that operating costs are the same in both cases, the higher potential revenue enables the repossessor to accept contingent work, remain financially viable and not take any added risk in the recovery.   

In today’s business environment, a contingent assignment has mutated into one which has all of the costs of non-contingent work, there is no added benefit if the collateral is found and there is no compensation for information provided the client via updates.  Using the same example above, if both contingent and non-contingent accounts pay $325, the agency makes $2450 non-contingent but only $1950 contingent.  With the escalating costs of insurance, equipment, personnel, fuel and storage lots, the agency’s expenses cannot be covered.  Add to this the fact that no storage fees or key charges are paid, and contingency is a losing proposition.  The same amount of work is required to handle contingent or non-contingent accounts, but it is clear that flat pricing for contingent accounts means the repossessor must work more accounts faster in order to earn the money necessary to cover his costs.   When you work more accounts faster, the risk increases!! 

To be clear, contingency is not bad per se.   The problem arises when contingency becomes the norm in the industry and revenue from contingent accounts is less than it would be for non-contingent accounts.  If the collateral is not recovered, the agent must expend time, effort and incur costs on an account for which even a close fee is not guaranteed.  In the alternative, the client’s position is significantly improved by receiving free information through the required update process.  If a client expects to only pay for recovered collateral, they should expect to pay a higher price than for non-contingent and should not demand free information on accounts not recovered. 

Given the reduced income and increased expenses, the hidden cost of contingency, as it currently exists, is the additional risk the recovery agent will take to generate the revenue needed to remain in business and feed his family.  Representatives of three major insurers on REACT’s Insurance Advisory Council (Aeon, Recovery First and the Walter P. Geoghan Agency) have determined that increased volume of contingent repossessions is a significant, uncontrolled exposure.  At REACT’s request, these insurers reviewed their claims history for the past few years and determined contingency is an activity which increases claims.  The increasing claims experience clearly shows that low price contingency is putting the recovery agent, the lender and the insurance carrier at unnecessary risk. 

THE CURRENT DILEMMA

The current state of the recovery industry did not develop overnight.  There has been a gradual decline for the past few years.  In addition to the declining fees indicated above, costs increased significantly.  The costs of operating a professional collateral recovery business have increased drastically with $60,000 tow trucks, higher wage rates, fuel costs over $2.00 per gallon, expensive secure storage facilities, computerized offices, high-end key machines, rising insurance premiums, damage free auto “entrance” tools and other expenses.  At the same time, recovery fees have dropped across the board.  The repossession fee now includes investigation, running multiple addresses, keys, storage and delivery to an auction.  Resolution and close fees are the exception rather than the rule.  In order to meet quotas, inexperienced collectors intimidate agents and force them to take more unnecessary risks or face losing assignments.  The fear of losing work and falling farther into financial depression prevents the repossessor from refusing the request or reporting it to the collection supervisors.  When a recovery agent cannot report inappropriate activity by collectors, the lender loses that ability to learn about their own employees who are exposing them to a greater risk of litigation.        

The next phase of the industry, the one affecting us right now, results from a combination of influences which came together as the ‘perfect storm’ for the recovery industry.  The ever increasing number of repossession companies offering services caused overall prices for repossession services to decline in terms of real dollars. This means prices for repossession services did not keep pace with inflation.  Contingency became a standard for more and more lenders trying to protect themselves from companies accepting assignments just to collect close fees.  Insurance companies found it difficult to evaluate the competency of their insured.  Incidents resulting from the inexperienced and uneducated people getting into the business to make a quick buck caused underwriting losses to rise.  These losses and the inability to properly establish consistent, measurable underwriting criteria has caused over a dozen national and regional insurers to leave the marketplace in the past five years, and insurance premiums, if you can find coverage, have skyrocketed.  

WHERE DO WE GO FROM HERE

Florida and California, two of the most populist states, have shown everyone the way.  The licensing requirements prevent easy entry into the market and require individual agents to be properly and professionally trained.  Louisiana, as of January, 2005 has also passed legislation requiring strict licensing requirements and enforcement.  Such enforcement, with stiff penalties for violations assures that the requirements are adhered to by all licensees.  Lenders can check license numbers and verify that the companies and their agents are in compliance with the law.  Insurers report fewer and less costly claims where licensing requirements are enforced.   There are two strong organizations, FLACARS and CALR, who are open to any licensed repossessor in the state.  These organizations lobby state regulators while providing a place to report grievances, information and training for their members.   Since the goal of these organizations is training and protection of the industry, they exist in harmony with any association that markets lenders on behalf of their members. 

Unfortunately, there are many forces that oppose regulation and it will be many years, if ever, before more states adopt laws that will adequately protect everyone involved in the recovery of collateral.  Without laws and/or enforcement, any state organization will have an uphill battle to get reasonable control over improper activity in their state.   Without a state organization to press enforcement, how many recovery company owners will spend the time and effort to follow up on rogue agents? 

As an example, Pennsylvania laws require all repossessions to be made by a licensed repossessor or an employee of the lender.  The law also provides for fines to lenders that use unlicensed repossessors.  Pennsylvania does not have a state organization.  How many Pennsylvania repossessors will take the risk of reporting an offending lender?  And, although Pennsylvania statutes require repossession agency owners to be reputable and free of any criminal violations, they do not require any investigation of repossessors hired by the agency owner. 

To avoid costly litigation, lenders and insurers must be assured of collateral recovery operating procedures that guarantee risk management during the recovery process.  In addition, lenders want to be assured that consistently applied steps will be taken to bring every account to conclusion in an efficient and cost effective manner with the very minimum of risks.  The choice is ours.  We either work together in a national effort to establish those guidelines or each lender, insurer and state (or federal) legislative body will establish their own.  How many different ways is there to report an update?  How many different condition report forms are in use right now?  What form does the lender require to insure that the recovery agent has earned a reasonable close out fee?  How do we regulate ourselves before someone else does it for us?  How do we stop and/or minimize the quick entry into this industry by non-professional, untrained, non-insured or improperly insured individuals? 

REACT’S  ROLE

This is where REACT comes into play.   REACT’s Recovery Industry Advisory Council, containing respected and trusted members of the recovery community, will work with REACT to create professional industry performance standards.  These standards will be presented to the REACT Insurance Advisory Council, containing respected and trusted people who insure this industry and chaired by Frank Boyer REACT’s Director of Insurance, for review and comment.  Once these two bodies are in agreement, we will present the information to REACT’s Lending Industry Advisory Council for their review and comment.   When all are in agreement, REACT will act as an independent body helping to monitor adherence to those standards. 

Until these standards are established, REACT will review every insurance policy being presented to lenders and post comments on our website as to the coverage contained in the body of the policy.  This should eliminate the policies that do not provide proper and adequate coverages and the so called repossessors insured by them.  REACT will continue to provide continuing education and will add third party programs that our education committee approves.  Please make us aware of any program you think would benefit our industry so we may review and add it to our list of approved educational programs.  

If we can evolve into an industry with standards which are enforced by us and accepted by our clients and insurers, we can turn around the current downward spiral.  Clients will pay to have a quick, professional, incident free recovery with the associated protection of the collateral after recovery.  Clients will also pay for factual, timely information regarding an account.  If this were not the case, the recovery industry would not exist. 

Similarly, collateral recovery companies and agents will provide these services at a reasonable fee, and the good operators will do so in the most cost effective and risk avoidance manner possible.  As claims are reduced, more insurers will enter the collateral recovery market.  As more insurers compete, the price of insurance will come down and the recovery companies with effective risk management and reduced losses will be rewarded with the appropriate coverages at a reasonable premium.

The old adage is that if you keep doing what you've been doing, you will keep getting what you’ve been getting.  Well, some of us are tired of getting what we’ve been getting and want to change things and take back some control over our industry.   So consider what you’ve been doing and decide if you want to keep doing it or not.  If you are not happy with what you’ve been doing, then get in touch with REACT and help us help you and the recovery industry.