Equipment finance Industry article by Shawn Smith
Top issue for the Equipment Finance Industry: Where’s my equipment?
The number one sore spot in 2018 for many equipment finance clients will be either equipment or guarantors that go missing. Especially when there are wheels involved, such as when they are dealing with over-the-road truckers (OTRTs). Here’s why: Even in 2018, it will still be impossible to execute a replevin when they can’t locate the equipment. Which makes it impossible to initiate a lawsuit when they can’t find the guarantor.
When my equipment finance industry clients complain that they can’t find their equipment or their guarantors, I usually tell them that they’re focusing on the wrong person. What’s that? The wrong person, you say? Well, who’s the right person, then?
Consider this: If a borrower wants to hide equipment badly enough, or a guarantor wants to hide him or herself badly enough, then they can pretty much drop off the grid entirely. But that doesn’t mean that the rest of their friends and family and going to follow suit. In other cases, where other people fail to help, I might tell my clients that they’re focusing on the wrong technology.
In our current age of social media, we professionals can accumulate analyze much more information than you probably realize, and we’re not just talking about information coming from relatives or associates. For example, have you ever seen a picture of a guarantor’s pet on Instagram or Twitter? Well, 90% of the time, the location where that picture was taken is where your guarantor is located, and often, your equipment is located there as well.
Now, here’s where the professionals come in: we have the ability to “heat-map” the location of where every such picture has been taken! Embracing and effectively utilizing technology will continue to be absolutely critical in 2018.
Should Equipment financiers consider legal action?
Issue #2: To sue or not to sue?
Many of our clients are increasingly moving toward immediately securing a judgment on all of their bad accounts. My hope is that they will take advantage of some tremendous opportunities to handle their legal activities more affordably, more efficiently, and more effectively in 2018. Here are two ideas.
My first idea: If they’re not already doing so, equipment finance leaders should, when allowed, consider having guarantors sign a Confession of Judgment (COJ) either before or at the time of funding. This not only provides an added deterrent to default but eliminates the need to later file a lawsuit or invoke service of process against a guarantor. With a COJ, you’ve removed one of a guarantor’s best defenses to payment, and you’ve potentially avoided paying thousands of dollars in legal fees and court costs that would otherwise have been incurred by you–in addition to those paid while executing your judgment and filing liens, levies and garnishments.
My second idea: If they’re not already doing so, equipment finance leaders should consider having their portfolios assessed for their probability of payment through the use of a scoring tool before taking legal action. The industry is awash with costly and worthless judgments that have been received by funders who believe that “going legal” should always be the first step when an account goes bad. Finding a reliable source to fully analyze what should be sued on and what shouldn’t be sued on is going to prevent you from throwing a lot more good money after bad.
Furthermore, a close friend of mine who works for a creditor’s rights law firm once told me that almost 25% of consumers and businesses who are sued by creditors end up feeling forced to file for bankruptcy protection within 12 months of funding. So, right off the bat, you might lose a quarter of your portfolio by “going legal” as a standard practice, which makes the selection of which debt to sue on critically important to the financial health of your business.
How can Equipment Financiers begin awkward conversation with guarantors?
Issue #3: They don’t want to talk to you. Ever!
The stress, stigma, and family drama that guarantors facing a financial crisis endured in 2017 will remain in 2018, and the last person that they will want to talk to will remain you–followed closely by anyone and everyone else who is connected to their defaulted obligation. Now, for an often overlooked, but extremely important point: Notice that I have not once in this article referred to these individuals as “debtors.” This is very deliberate on my part.
Understanding the psychological state of someone who is facing a financial crisis is a critical component of the way that we operate our business, and because we are one step removed from the actual funder, we are able to treat those in default with more respect, integrity, understanding, and patience than they might otherwise receive from someone who was more involved with the actual funding decision.
Furthermore, we find that a large portion of those who have been placed into collections with us will tend to respond incredibly well to a fine-tuned communication campaign that offers them options rather than ultimatums. In contrast, we have also found that having had even one past, negative experience with a debt collector or an in-house recovery agent will dramatically reduce an individual’s willingness to pay anything to anyone–ever.
So, if you currently employ an in-house collection strategy, then you must really pay attention to what’s going on in your call center. Given the sensitivity around collections in general, ensuring that your team operates with respect, integrity, understanding, and patience will both lower your reputational risk and increase your brand value. And, as I am sure you are aware, in today’s social-media-frenzied population, it takes only a few negative digital comments in the digital universe to bring a firestorm to your door.
What regulations may impact commercial collections?
Issue #4: State regulations and the CFBP…
To date, the commercial collection market has generally not fallen under the rules of the federal Fair Debt Collection Practices Act (FDCPA.) However, even though Richard Cordray has resigned and the current administration is working to dismantle, or “fix,” the Consumer Financial Protection Bureau (CFPB), we must still approach everything that we do in 2018 with caution.
We have probably all heard stories about collection agencies or companies handling their own recoveries that have landed in hot water with their local or state regulatory agencies, or been slapped with an enforcement action from the CFBP. The compliance function will continue to be a necessary survival component for in the collection’s industry in 2018, and those companies that have loose compliance standards–or even worse, error-laden compliance platforms–will put their entire organization in peril.
Remember: Going through each one of your processes, documenting them, and developing corrective action plans if needed, are all critical duties before you find yourself face-to-face with a regulating authority, and it only takes one complaint to get on their radar.
What can Equipment Financiers do when a guarantor dies?
Issue #5: Death. Everyone is a customer.
You wouldn’t believe how many organizations we see that still have no protocol for handling “deceased” accounts, other than to close the file. This will almost certainly continue to be an issue in 2018. Given the ever-increasing “bubble” of baby boomers who are now entering retirement age, equipment providers are inevitably going to end up with deceased guarantors. Knowing when to, and how to, file claims against estates and trusts is therefore going to continue to be an absolute must.
So, do you know how to work effectively with probate attorneys while still truly respecting the sensitivities that are involved in estate recoveries? Those who do can dramatically improve their bottom line, and it’s easier to do than you might think. For example, there are several companies that handle higher-volume estate recoveries on a national level. However, even if your volume of estate issues is relatively small, you can still either research the process yourself in order to develop an internal mechanism, or seek out collections agencies that have already done all of the legwork for you. Remember, there’s a very narrow window of opportunity to recover estate debts, and waiting until it’s too late can result in both irreversible and negative financial consequences for you.
The Equipment Finance Industry Changes.
Issue #6: Stay Educated.
Lastly, and perhaps most importantly, in 2018 and beyond you will need to stay educated by monitoring industry trends and both current and upcoming regulations. I, and my all-important staff, try to continuously monitor industry insider websites, state and federal regulatory bulletins, and CFBP releases–even if they are–today–only concerned with consumer issues. Staying informed in this way not only allows us to keep our clients and ourselves out of harm’s way, it also allows us to develop strategies that we can deploy in the future in order to ensure continued profitability.
When we discover something that our clients haven’t yet heard about, and then share it with them, the feedback that we often get is something along the lines of “Thank you so much for bringing that to our attention!” Then, they share the information with their compliance personnel so that they, too, can stay informed. Whether you’re a vendor, or your niche is equipment finance, capital investments, factoring, MCA’s, micro loans, micro financing, or recoveries, staying “plugged in” to the current state of affairs and the chatter about the future can mean the difference between being either well prepared or cleaning out your desk after an embarrassing board or investor meeting.
I hope that you have found these thoughts to be helpful, and I wish you all a safe and prosperous 2018!
Shawn Smith – CEO of Dedicated Commercial Recovery Inc.
Your partner in Commercial Recoveries
Article originally published in NEFA Magazine Jan/Feb issue