How has the regulatory climate affected your appetite to provide financing to businesses that purchase or originate debt in the charge off or subprime markets?
We haven’t changed our view of the asset class … we remain bullish and intend to continue to invest heavily into the market. In fact, FLOCK has just launched FLOCK Specialty Finance with institutional funding to expand our purchasing power to $350 million.
How has regulation changed the requirements you put on the recipients of your financing? From a due diligence perspective? From an analytics and operating perspective?
Our criteria for qualifying debt buyer partners is comprehensive. Our initial due diligence has a regulatory compliance assessment to evaluate whether the prospect’s fundamental operational processes, and monitoring of key activities are sound, and that if problems occur, corrective action is taken in a timely manner.
We update our findings during periodic operational and financial reviews. Our clients will be required to comply with the new rules promulgated by the CFPB as they have done, and will continue to do, with the rules established by the FDCPA. Flock and our debt buying partners view these regulatory constraints and oversight as a means of separation from non-compliant, problem operations.
Has regulation changed the terms and conditions of your financing? Is regulation making financing more risky, hence more expensive?
The debt buying and collection industries traditionally have had few barriers of entry. Because of the potential high margins and low entry costs, there have been a lot of individuals who would either self-fund, use friends and/or family, or high net worth individuals. These funding relationships could be considered “personal”. These are the businesses that we most likely would not have funded.
Terms and conditions of our financing have not changed because of regulation. We have moved from a fund structure to a specialty finance company to provide more flexibility due to new markets and asset classes.
How has regulation affected your marketing strategies? Is debt buying still an attractive market in which to deploy capital?
FLOCK is ‘bullish’ on the debt buying industry. We are becoming ‘Bigger, Bolder’ so that we can better service established small businesses in this changing industry. We recognize that these industries will have to change some of their practices; so we have changed our practices to help them meet these challenges.
Are you looking for new markets? Less regulated, faster growing?
Yes we are looking at new markets, but most markets FLOCK will enter will still have some sort of government oversight. All consumer credit, whether credit card, auto, healthcare, tax liens or merchant financing will have some sort of regulation or oversight. Most any industry that has an impact on the consumer is going to have some sort of government regulation. Oil and gas companies always invite scrutiny any time they try to collaborate together. So whether it is healthcare, telecommunications or funeral services, there is some sort of oversight that is a part of many industries.
As with any business, we are looking for emerging markets that can be scaled. Regulation is not a factor.
Are you helping your existing clients penetrate new markets?
FLOCK believes that middle small businesses collecting consumer obligations are good at understanding their operations capabilities; then matching the price and demographics portfolio to those capabilities. They probably do not have the same ability to develop new markets. Flock is upgrading its ability to help.
What’s your outlook for the debt buying market? Will it rebound? If so, when?
We view the debt buying industry no different than other industries that have government oversight. The industry is in a period of uncertainty, which is being caused not only by the CFPB, but also by other industry dynamics, such as consolidation. At present, originators and resellers need to reduce their risk during this period of uncertainty. Uncertainty increases risk. So it is normal to stop selling or only sell to those that can be trusted during this time. Once this risk is managed, the financial needs of the originators and sellers will probably dictate how much they sell, not government oversight.