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Consumer Debt Trading with Debexpert’s Ivan Korotaev and Daniel Bloomgarden
I’m happy to have Daniel Bloomgarden and Ivan Korotaev. I’ve invited them on here to talk about something that we haven’t talked about in the past at DistressedPro.com on this interview series, which is consumer debt. We spend a lot of time focused on and talking about real estate debt and business debt in a lot of the content that we’ve produced here but there’s this whole other world of things, which is general consumer debt. We’re going to dive into that a little bit to understand more about the business of that, how folks make money with it, and who’s buying it. We’re going to take a look at our new platform that’s coming to the US. It’s in five countries already and it’s coming to the US. There will be auctions happening here in the US. Daniel is an Account Manager in Debexpert and Ivan is the Founder.
Thanks for being here, guys. Who wants to talk a little bit about this market, the size of it, who’s in it, and how money is made in it?
Ivan: First of all, thanks a lot for inviting us to your show. It’s great. It’s a pleasure to be here. A few words about the Debexpert. This is an online trading platform that allows you to buy and sell delinquent debt in a few clicks. On the platform, there are sellers, banks, other lenders and buyers, investors, collection agencies, and professional buyers. We started our business in 2019 in Russia. We achieved good results and now we have a 70% market share. We rapidly became a big fish in the pond. We started to expand our web right in five countries and we entered the United States.
That’s an impressive run in a short period of time.
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Let’s talk a little bit about the market because, as I mentioned, most of the folks who are reading this blog have some real estate background. They may have purchased some real estate notes before. Some of them may have purchased CNI or other business type debt. Consumer finance isn’t something we’ve talked about very much here. In broad strokes, talk about how that business works. Who are the sellers? What kind of debt are they selling? How many pennies on the dollar are you buying it for? Help us understand what those trades look like.
Ivan: The market and investors on the market operate in this area. They purchase delinquent debt accounts for cents on the dollar. In most cases, they outsource recovery from third-party collection agencies and that’s a common scheme for the whole world. I’ll pass it over to Dan to provide some examples because he is extremely experienced in the collection industry in the US. Dan, would you provide an example of how you care of healthcare or some other industry?
Daniel: Thank you for having us on here, Brecht. Industry average on collections varies depending on what type of debt it is. We’re going to be hosting auctions for credit card debts, auto loans, mortgages, medical bills, etc. Let’s use medical, for example. Usually, a portfolio might be purchased for $0.10 to $0.12 on the dollar and an average liquidation rate or the amount that they are able to collect is around 15% to 18%. With a $1 million portfolio, a buyer might buy it for $100,000 and hope to recoup $150,000. That is the margins that we’re looking at.
I know there’s a lot of regulation in this space. What does that look like as a buyer if you invest in something like this? Who manages? Who does the collections? What does that side of things look like? Obviously, you don’t buy a portfolio like that and pick up the phone.
Daniel: Some collection agencies themselves are debt buyers but more often, you’ll have an investor who purchases a portfolio and looks to outsource the collection work. This is similar to the landlord property management service relationship. There are thousands of certified collection agencies in the US and it depends on how the relationship is made and what fees the collection agencies are looking for. We can also help steer buyers in the right direction and point them towards collection agencies for that service.
What does that structure look like usually? Is it percentage-based or volume-based? How is the agency compensated?
Daniel: They work on a contingency-base and get a percentage of what they collect.
Do you have some sense of the market size out there?
Daniel: Ivan might be able to handle this one a little better but it’s almost infinite at this time. If you think about it, 1 in 3 Americans is in collections of some sort.
Ivan: Our assessment of the market is more than $3 billion are invested on a yearly basis into consumer delinquent debt accounts.
Who do you anticipate seeing on your platform as the buyers and sellers? Who’s the best suited for it? We have a wide variety of folks who are looking to learn how to get into the bank-owned real estate or non-performing mortgages to very successful family offices and hedge funds and that thing. It’s a wide variety of folks who are listening to this. Who are the right buyers or even sellers for your platform?
Daniel: The size of everyone varies and we took that into account with our platform. By dividing portfolios into pools, there are some smaller ticket portfolios that allow for some of the smaller investors to participate in debt buying. There are portfolios that the starting price is $300,000 so you can buy individual pools or the entire portfolio.
What would be a small-size trade on your platform?
Daniel: We have some pools on there for around $6,000 to $10,000. This is a great way to get your feet wet if you’re new to this sector, want to experiment and see the profitability of buying some portfolios.
If you were to invest in something small like that, are there agencies out there who will take small portfolios to work them?
Daniel: Yes, collection agencies are looking for as much work as they can get.
On a $6,000 to $10,000 trade, how much might that represent? Is this a $0.10 on the dollar a purchase at a $60,000 or a $100,000 face value on that debt?
Daniel: Roughly around that.
I’m going to ask you some nitty-gritty. The closest thing to this is non-performing second position mortgages or home equity lines of credit where it’s secured but it’s junior. The borrower and the integrity of the borrower are important. The other thing that’s important is volume. It’s not advisable to put all your eggs in the single non-performing second mortgage. You need to spread your investment around so that you don’t have all your risks in that one thing. How many accounts are in a package as small as that you’re talking about?
Daniel: It varies and you can see this on our platform with each pool exactly how many accounts are in it. A trade like that could be 30 accounts in the pool. It could also be 100. It depends on the average size of each debt.
You mentioned that you have some of that in your platform already. Do you have a demo handy where you can show us what we might find in there?
Daniel: First of all, our landing page has some basic company information and history. We would log in. I’m already in here under one of the demo accounts. This is a demo auction that we set up to show prospects how the bidding process works and what the auctions look like. This portfolio is divided into three different pools and this is one of the more expensive ones. You can go into each pool and get a lot of detail on what’s in there. You’ll find the masked file for that pool, which is a common term in the collection industry. It’s the Excel sheet that has the debtor name, client ID, amount of the debt, and all the crucial information that would be needed to collect.
Under Documents, you’ll find any other relevant documents to the collection process along with a purchase and sale agreement that’s uploaded by the seller. You can see some information about the specific pool. For instance, this one has 160 different accounts in it and the total debt is $10 million but the opening price is around $100,000. Another feature is any time before or during the auction, you can chat directly with the seller if you have any questions.
While we’re on here, tell me a little bit about what files transfer and how you facilitate that or not. Most folks understand when you’re buying a note, the different documents that’ll go with that, but what are the actual documents that you’re moving around? How do you do any due diligence on them and how does the buyer receive those or the rights to collect?
Daniel: I will open a masked file to give you an idea of what’s included in the other documents that might apply our judgments, additional medical documents of any kind that would accompany long-term hospital bills. This is a lot of information when you first look at it but it’s also informative to your collection process. You have the client ID, the credit agreement, the date of birth, and gender. The more information you can provide about each debtor, the higher the chances of collecting the debt. The more information contained in these files, the better. You can see things like where the credit originated, where the debtor is located, the total amount of their debt, etc.
In addition to the masked file, you can see the purchase and sale agreement, which would be signed between the buyer and the seller at the end of the auction. This addresses such things like the transfer of files for money, ensuring that the portfolio the seller sends is what was advertised in this masked file and the other documents. Sometimes in the industry, we heard stories about swapping out a good portfolio and slipping in some junk accounts. Those are the kinds of things that we wanted to make sure the buyer has recourse for. If it were to take place they would be reimbursed with either money or replacement accounts.
Walk me through the process a little bit from the buyer’s end of things. If I come in here, find something that’s within my investment range, review the pool, and then presumably get comfortable enough to make an offer, what happens then?
Daniel: You’ll make a bid. All you have to do is press the green hammer and it will automatically submit the next minimal increment of bids. You can also set up an automatic bid where you can put in your maximum price and anytime you’re outbid, it will automatically place the next incremental bid for you. Our platform is also a mobile app, which is a great convenience because you can get notified in real-time if you have to change your bid, if someone outbids you, or even if a new auction starts that you want to participate in. You can do all of that from your phone.
Walk me through what happens if I’m a successful bidder.
Daniel: If you win the auction and purchase the portfolio or one of the pools within the portfolio, the buyer and seller would sign that purchase and sale agreement. They can exchange files in this shared drive here, and they can do all their communication in our chat section, which is convenient because it’s always stored on our servers to come back if they need to recheck any information. At that point, the buyer would transfer the money and the seller would send them the files. Our platform would invoice whichever party the seller chooses to pay the commission. Our commissions run from 1% to 5% depending on the sale price.
Talk to me about what a buyer should expect to find in those files that they’re receiving from the seller.
Daniel: They should expect to find exactly what they’ve done their due diligence on and decided that they want to bid. They see this masked file that contains enough information that they think they’ll be successful in collecting enough to make a profit. They will receive exactly that.
What I mean is there’s loan agreements presumably and there’s some transfer of rights. Talk to me a little bit about those as somebody who hasn’t traded any consumer debt before. Talk to me a little bit about the actual nuts and bolts of that.
Daniel: The actual transfer of ownership?
Daniel: First, we vigorously check that anything being sold is legally allowed to be transferred. The original creditor is still liable for how the collector behaves. That is enforced and regulated by the FDCPA, the Fair Debt Collection Practices Act. We make sure that all of our platform members strictly abide by these practices which include not being abusive or threatening legal action. If a consumer doesn’t pay their debt, there are strict guidelines to how you can go about collecting a debt. At the end of the auction, the seller will transfer not only the unmasked file but all the accompanying documents with it.
The rest of it is completed with this purchase and sale agreement, and this transfers the rights.
Daniel: It transfers the rights and lays out the contract agreement between the buyer and seller so that the buyer has some recourse if the seller doesn’t provide exactly what they said they would.
I appreciate that whole introduction into this world. What questions haven’t I asked you about this so far?
Daniel: For one, I did want to show this example of the purchase and sale agreement. This is a boilerplate one that we uploaded. Something that I’ve learned in talking with people in the industry is that for the most part, they’ve only been able to deal with sealed-bid auctions meaning a blind auction where you submit your highest bid and see what happens. We do offer that type of auction but in addition, we have two other types. The first is an English auction, which is your typical people outbidding each other until the end.
We also have a Dutch auction, which is an interesting option because the seller sets up different stages. They usually last a day and on the first stage, they asked their highest price. With each day, the price drops a little bit. As a buyer, you can strategically say, “I want to buy it on day four for this price,” but then you run the risk that someone can come in on day three and whoever makes the first bid wins. It’s an added benefit that we offer these other kinds of auctions and not just the sealed bid.
I don’t know if you know but I’m an auctioneer and that’s a gavel and not a hammer. There are a lot of different variations of auctions that will produce some different results although auction theory says that regardless of how you approach, you end up at market value. I don’t know if that’s true or not.
Daniel: That’s something that we hope. By centralizing this marketplace, the market actors will determine and set a fair market price.
What else have I not asked?
Daniel: Nothing that I can think of. Ivan, is there anything that you wanted to add about this?
Ivan: No. I think we covered almost everything from my side as you then have shown. The platform is an easy way to get access to portfolios, browse, make bids, purchase, communicate, and exchange files. We would like to see experienced buyers and buyers who consider this as a new investment opportunity to try the batch part and see how it works.
Daniel: Something I might not have mentioned also, our platform is free to join. You pay nothing until you win an auction and purchase a portfolio then the commission that we talked about comes in. The three things that we want to stress about our platform are how user-friendly it is, how transparent it is because you can communicate directly with the sellers, see what the portfolio looks like, and the much wider access to a range of portfolios that you gain the second you join the platform. Your network expands exponentially.
On the first day of Q4 of 2020, when do you expect the first US auction of debt to show up on your platform there?
Daniel: We’re thinking auctions will begin in early November 2020. Hopefully, on November 1 to start to make things nice and organized.
Thanks, guys. I appreciate you coming on here and talking about something that most of us didn’t know much about and introducing another avenue for folks to profit in this wild economy and market.
Daniel: With the pandemic, the industry is seeing a lot more activity.
It will be a good time to have cash.
Daniel: Ivan, was there anything else you wanted to add?
Ivan: No. I want to say thank you for inviting us. It was a great time. Welcome all users on the platform.
Hopefully, we’ll talk again soon.