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Bad Debt Gets a Good Name
By Forrest Preece
Say “bad debt” and most people cringe, thinking of maxed-out credit cards and back-breaking payments. But Louise Epstein, MBA 85, saw a golden business opportunity in bad debt. And her vision has paid off handsomely —to the benefit of the banking community and consumers alike.
What’s more, in an era of dot-com collapses, the Internet business model of Charge-Off Clearinghouse (COC) is an unmitigated success. In July 2001 Inc. Magazine featured Epstein, along with ten other businessmen and women, for achievement while being small to medium players in a larger industry. “Our efforts are focused on building a solid business and utilizing technology whenever possible to keep costs down,” Epstein says. “We are not trying to be the biggest player in our industry, but we are striving to be the best at what we do.”
Epstein’s industry is known, really, as the Bad Debt Market, which she says represents the “underworld” of banking. COC purchases national portfolios of charged-off (uncollectible) credit card accounts from banks and other financial institutions and resells those accounts to law firms and collection agencies across the country. “Because we enable banks to recover some of their costs on delinquent accounts, the charges they pass along to their paying customers (in the form of higher interest rates) are minimized,” she says.
Why don’t banks sell their accounts to Epstein’s customers directly? It’s a matter of smart business. Banks would rather sell one large portfolio to COC than sell fifty smaller portfolios for a higher price. There is a substantial customer service infrastructure necessary to resell uncollectible accounts—and Epstein’s company has automated the process.
Indeed, COC’s proprietary systems enable Epstein to manage vast quantities of data. Her systems let her track each account as it moves from her company to one of the 5,000 or so collection professionals who maintain contact with her firm through her site: www.chargeoffclearinghouse.com.
COC’s successful Internet business model actually came about as an afterthought. When she first started the company in 1997 Epstein faxed or e-mailed portfolios to potential customers. As the popularity of her product grew, and the number of customers steadily increased, she had to think of a more efficient means of communicating the data.
“It was either staff up or ramp up technology,” remembers Epstein. In 1998 COC became the first in the industry to list portfolios online and provide interactive capabilities to web visitors. COC’s website is still the only industry site that offers its visitors the ability to create any combination of portfolios from its “warehouse of available debt” and download spreadsheets (sanitized of private data) without assistance. “And while our customers can conveniently access volumes of data, we also offer an interpretation of the data in the form of our analytical reports. The reports short circuit an otherwise lengthy decision making process,” says Epstein, “They make buying easy.”
“COC can carve out a small enough portion of accounts for you to try it, without committing substantial funds; you don’t have to make multi-state, multi-million dollar buys,” says Stuart Wolpoff of Wolpoff & Abramson, LLP. A customer since 1998, Wolpoff actually had to be convinced by Epstein to try this way of doing business. “It was like ‘Green Eggs and Ham’,” he says, “Once you finally try it, you really like it.”
Governed by different collection laws in each of the fifty states and the rigorous Federal Fair Debt Collection Practices Act, collectors have it easier if they can collect on debtor accounts that are in close physical proximity to them. By purchasing state-specific blocks of debt from COC, they can accomplish this goal. Plus, agencies get to keep 100 percent of what they collect on accounts that they own. “The traditional third-party collection business only allows them to keep about 30 percent of what they collect,” Epstein explains.
Epstein’s proprietary systems also help her to purchase portfolios at a price where both her investors and her customers can meet their targeted rate of returns. “We only purchase a portfolio after it has survived the rigors of our sensitivity analyses,” she says. “Still, portfolio pricing is both an art and a science—the numbers aren’t everything. When we offer a portfolio for sale our customers know that Charge-Off Clearinghouse has taken a bigger risk than any of them are contemplating.”
A portfolio sales manager with Home Federal Savings Bank in Sioux Falls, SD, Stacy Gunnarson says, “We really don’t have the time, knowledge, or the contacts to accomplish what Louise takes cares of for us.”
Epstein credits her education at the University of Texas as integral to her success. “I took every data processing and management information systems class offered during the time I was in graduate school,” she remembers. “I figured that being able to understand how systems worked and what programming was about would give me a leg up in the business world. I wanted to be able to communicate with programmers in order to get things done.”
Sure, Louise Epstein may have learned about information systems in the days of mainframes and punch cards, but she’s harnessed the Internet and ridden it to success.
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