In the business of buying and selling loan portfolios, buybacks are similar to returning defective merchandise to the store. The retailer ensures the product will perform as advertised, and if the item breaks down within a set timeframe, the purchaser can return it for a refund.
In the case of a loan sale, returns are generally referred to as “buybacks”. Buybacks are a Seller’s guarantee to a Buyer that the loans have a reasonable likelihood of performing, and they conform to all government regulations.
If you have sold loans, especially those of the non-prime variety, you’re probably aware that most loan buyers require a period of recourse. The typical period of recourse is between 30 to 90 days and requires a seller to repurchase a loan under certain specified conditions within that time frame.
Buyers utilize the recourse period to notify customers of the sale, answer questions, and familiarize them with their servicing platform; i.e, who, where and how to make future payments. Account servicing during the recourse period allows the Buyer to identify any serious issues with an account they were unable to discover during the initial due diligence.
Contrary to some beliefs, a seasoned Buyer doesn’t look for excuses to send a loan back for repurchase.Buybacks, especially in large numbers, pose the risk of negatively impacting the relationship between the Buyer and Seller and that Buyer is always part of the “chain of ownership” which can add additional risk for the Buyer.
Also, a high number of buybacks in a portfolio can lead a Buyer to wonder if you are trying to pass off an adverse loan selection and could affect future pricing for your loans, and jeopardizes the potential for a long-term and mutually profitable business relationship. On the flip side, you’re not going to be happy writing a lot of buyback checks, reboarding loans, and having to explain why you are bringing the customer back in-house.
Now that we’ve established buybacks as a lose/lose transaction for both you and the Buyer, you should do everything you can to eliminate them before the sale and take steps to avoid buybacks after the sale.
Remove Problem Customers.
When the opportunity for a sale arrives, it’s only natural to want to dump problem customers on someone else.
The vast majority of your customers are reasonable people who make their loan payments on time and when they do hit an occasional bump in the road, are agreeable in making payment arrangements. Most buyers understand that “life happens”, and so do slow pays.
Then there are the headaches. The hostile, combative, uncooperative, have complained about their vehicle since the day they drove off the lot customer. They are the chronic slow payers, arrangement breakers, and prone to give you an earful of colorful language that would make even a, well, bill collector blush.
Although tempting, it usually winds up being counterproductive to include these types of problem accounts in your file selection. There is no reason to believe that they will treat the new buyer any better than they did you, and sure to be among the first buyback accounts.
It’s cheaper and less hassle to keep those headache accounts than to sell now and buy back later. Besides the aforementioned potential of damaging the relationship between you and the Buyer, selling and buying back a loan could create even more of a strained relationship between you and an already difficult customer.
Go ahead and toss those rotten apples out of the barrel beforehand.
Exclude Loans With Impaired Collateral.
In non-prime auto finance, there isn’t much that will cause a customer to default and force a buyback faster than a broken down or badly damaged vehicle.
Accounts with impaired collateral are not always recognized during due diligence but are usually uncovered during the recourse period, and when they are, you can count on it being an immediate buyback. However, most experienced buyers, especially those with retail auto experience, understand the difference between a complaint where they just need to perform regular maintenance and one that needs a tow truck. You shouldn’t worry about being asked to buyback an account because they need wiper blades or an oil change.
Toss out any loans wherever you are aware that the engine is blown, the tranny is sitting on cinderblocks in the customer’s driveway, or the vehicle has been wrecked or totaled. And don’t forget to exclude impounds.
Communicate With Your Buyer.
Your Buyer should be willing and able provide you with regular portfolio performance reports for all loans under recourse. A good Buyer will provide you with a weekly portfolio review throughout the recourse period.
A regular portfolio review allows you to track the performance and provides a heads up on any accounts that are problematic. Comprehensive reports will alert you of any potential buyback accounts and help identify possible systemic issues.
For example, if you see the Buyer has a high number of customers that they are unable to contact, contact them and verfiy that they have the correct phone numbers and mailing addresses. It only takes one error in an electronic boarding file to cause the wrong demographics to be populated into the buyers servicing system, so it’s a good idea to have them verify the customer demos if you notice a high number of “no contacts” in your reports.
As helpful as reports can be to prevent unwanted buybacks, don’t fail to speak directly to your Buyer’s Portfolio or Acquisitions Manager frequently and find out if there are any problem accounts that you may be able to help with.
Talk To Your Customer.
After the sale is complete, do everything to you can to ensure that your customer is aware that their loan has been sold.
Make sure the seller sends a “Goodbye” and “Welcome” letter to the customer. A Goodbye letter sent on your behalf thanks the customer for their business and introduces them to the Buyer. The Welcome letter contains the Buyer’s information and explains how and to whom they’ll be making their future servicing inquiries and loan payments.
Letters don’t always get read so don’t rely wholly on them to do the job of notifying your customer of the sale. Once your customer discovers their loan has been sold, they are likely to contact you with questions. Make sure that your staff is not only aware of the loan sale but prepared to explain the sale to your customer and provide them with the Buyer’s contact and payment center information.
In my past experience as a Portfolio Manager for a loan buyer, I can assure you that good communication is essential in avoiding excessive buybacks. Talk to buyers, customers, and your staff regularly and you’ll be writing far fewer buyback checks.
To summarize, an ounce of prevention could be worth a pound of cash when it comes to avoiding or reducing the number of buybacks.
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