The ARM Industry is in for a Long Recovery

Mike Ginsberg

My last blog entry covered three of the top reasons why the ARM industry is in for a long recovery process, taken from my opening session of the ACA International conference earlier this summer in Dallas, “The State of the Debt Collection Industry.”

Today’s blog focuses on some of the pressures directly impacting ARM companies, including erratic liquidation results, increased regulatory and media scrutiny, and additional burdens confronted by small businesses.

Liquidation performance has been a roller coaster ride since the start of the recession

This table shows average liquidation declines by stage of delinquency for credit card debt:

Average Credit Card Liquidation Decline

Stage of Delinquency	2007 to 2008	2008 to 2009	2009 to 2010	H1 2010 to H1 2011
Fresh	20% – 30%	30% – 40%	-10% – 5%	5% – 20%
Primary	20% – 30%	30% – 40%	-10% – 5%	5% – 20%
Secondary	25% – 30%	20% – 30%	-5% – 10%	5% – 15%
Tertiary	20% – 30%	20% – 30%	-5% – 15%	0% – 15%
Quads+	15% – 25%	25% – 35%	5% – 20%	0% – 10%

The negative numbers in 2009-2010 indicate average liquidation improvements.
Q1 2011 started off strong, similar to 2010, but petered out quickly toward the end of March and beginning of April reflecting the seasonality of debt collection. Since then, we have seen slight reductions in liquidation performance across all stages of delinquency in Q2.
One important note about these ranges – they represent a combination of low, mid-range and high balance accounts. When we look at performance by average balance size, we note that on average larger balances (> $3,500) are experiencing greater liquidation declines than lower balances.
Reduction in government stimulation has impacted debtors’ abilities to make large, up-front payments or total payoffs.

Increased regulatory and media scrutiny placed on the industry

The focus of the CFPB and FTC on collection practices has been the talk of the ACA and DBA throughout the summer and this will continue for the rest of the year and into the upcoming election year.
Federal Legislation, including Truth in Lending Act (1968), Fair Debt Collection Practices Act (1977) and Telephone Consumer Protection Act (1991) is outdated and will be updated or rewritten
12 states are active with debt collection regulation and numerous State Attorneys General are focused on ARM procedures
Various news and media outlets continue to paint ARM in a negative light

Small businesses in the ARM industry continue to grapple with jittery clients, rising costs and tight credit

70% of businesses in the US have no plans to expand staffs over next 12 months (US Bancorp survey)
In the InsideARM survey 60% of agencies said they plan to increase staff
78% of companies surveyed project higher revenues a year from now but said the US economy is still in a recession and expect it to be there next year
Clients across various market segments continue to lower fee rates, increase costs and reduce the number of agencies used
Banks continue to be conservative when lending to debt buyers and collection agencies
In May, the optimism index of the National Federation of Independent Business declined for the 3rd month in a row
Small businesses account for more than 50% of private sector employment and gross domestic product

My next blog will focus on the number one reason why the ARM industry is in for a long recovery process.

Mike Ginsberg is President and CEO of ARM advisory firm Kaulkin Ginsberg, and can be reached by email. The firm is celebrating its 20-year anniversary in the ARM market.