SIFs: How much is too much?

If you’re a borrower, you probably can’t get enough of Settlements in Full (SIF).  Buy a flat screen for $1500 and pay it off six months later for $600.  A SIF rate of 40 percent means your account is settled, and although your credit history has been hit, you can stop worrying about this one account. 

If you’re a collector, you probably like SIFs as well.  If your commission is 5 percent of gross collections, you’ve just made $30 on one phone call.  You’ll probably be happy making calls like that all day long.

If you’re an agency owner, you’re not unlike your collectors.  Five hundred settlements for flat screen TVs at 40 percent translates to roughly $300,000 in gross collections.  If you own a primary agency, and your contract calls for a 25 percent contingency fee, the arrangement has led to revenues of $75,000. 

If you’re a credit issuer, settling the 500 flat screen TVs at the 40 percent settlement rate brought you $300,000, minus the $75,000 fee you paid your primary agency.  If more of your borrowers would not have settled for more, you’ve received an impressive 40 percent on bad bets that took place when credit was extended.  Better to have less cash now than the potential for more cash later; a bird in the hand is worth two in the bush.

Unless…

The SIF rate is 50 percent instead of 40 percent, maybe fewer debtors settle, fewer collectors get commissions, fewer agency owners see revenues, and fewer credit issuers are happy with their settlement policies.  Higher price point, lower volume, lack of equilibrium.

Or, if the SIF rate is 25 percent instead of 40 percent, maybe too many borrowers settle, collectors could have gotten better commissions, agency owners see less revenues than they would have, and credit issuers would have done better asking for more.  Lower price point, too much volume, lack of equilibrium.

With SIF rates, an equilibrium can exist in the debt collection universe, bringing the interests of borrowers, collectors, agency owners, and creditors into alignment.

Paul Legrady is Director at ARM advisory firm Kaulkin Ginsberg, a sister company to insideARM. He recently released a whitepaper on Settlements in Full, "Settlements in Full: Debt Collection and the U.S. Economic Recovery," which is available for free download at http://www.insidearm.com/go/settlements-in-full-debt-collection.