By Damon Edmondson, Chief of Analytics, FLOCK Specialty Finance
Recently Flock Specialty Finance, in conjunction with one of its clients, discovered what many might see as an anomaly; Some asset classes of subprime originated accounts performed better than Prime when collected post charge off. The debtors were graded as Subprime or Prime based on their credit score at the time of their initial contract with the credit originator. We delineated the categories at a score of 640 as measured at origination.
The metric, across over many pools of accounts and thousands of observations, showed that in 95% of tranches the Subprime outperformed the Prime debtors by a material amount.
Speculation and a subject for further research is to ask why. Potential solutions suggest that the initial credit score of an account at origination has less bearing on the ability and willingness of the debtor to pay in a post charge off environment. The effect on credit score of a default turns most consumers into subprime as a result. Therefore, the fact that a now debtor was prime or subprime 18 months ago may not directly bear on collections in a post charge off environment.
A debt buyer may be well advised to examine the condition of the consumer as they exist at the time of their purchase of the account, rather than marketing language based on the condition of the consumer at the inception of the original loan. The original credit score may point to those consumers having greater potential long term collectability or that the score may reflect their lifetime earnings capacity. Such a study would take considerable time. That time frame in any case may be beyond the scope of most buyers desires for return of capital.