CreditCore Group Investments (CCGI) manages a platform allowing issuers to minimize losses resulting from consumer defaults.
Through a verification process, CCGI helps originators find out which borrowers in a given pool are still able and willing to repay their financial obligations. After these borrowers are identified, these loans could then be re-originated, helping issuers recoup some of their losses.
“So far there’s only one option that institutions purchasing from the secondary market have for curing these portfolio problems and that’s collection,” said Head of Research and Development Monica Evans. “That’s a real extreme, and in the marketplace we need something that’s right in between the issuer and the debt collection process, which is where re-origination sits.”
Currently the platform has only been applied to credit card loans, although CCGI has worked on a small MBS portfolio previously. However, the deal was never completed. Auto loans are not far behind, but student loans, since these are heavily reliant on government involvement and has a different payment structure from other consumer assets, cannot be re-originated.
Evans said certain government regulations have to be firmed up before the platform could be applied to mortgage-backeds. The platform has to comply with existing regulation, including the recently amended bankruptcy laws.
Re-origination is Evans’ brainchild. She was approached back in 2002 by a group of securitization professionals who were beginning to see signs of market distress. Evans recognized a “bubble” forming where consumers will have to save themselves from their financial obligations, and projected that there will be a need for a process to cure those obligations without harming the consumers’ FICO score.
The platform — based on the Adaptive-Market Hypothesis (AMH) presented by Dr. Lo in his article called The 3P’s of Total Risk Management written in 1999 — utilizes a verification process that investigates consumers by looking beyond their FICO scores, while leaving loans in the hands of the originating bank.
The verification process allows the bank to eliminate extraneous accounts, or any red-flagged accounts, and collect the maximum amount of payment from consumers, rather than simply reselling the loan at low market value. This helps the institution because any sale usually diminishes the value of a loan.
After the verification process, issuers can find out the number of consumers who are eligible to pay their obligations through CCGI’s payment plan and related insurance. This projected number is typically 60% or higher of the original amount of the portfolio, which is a far cry for the five cents on the dollar that these loans are currently valued at given the depressed market conditions.
CCGI then gets in touch with the consumer through a legal mailing process. The electronic mailing invites borrowers to register on a secure Web site and participate in a payment program, which only happens once. If the consumer does not respond, then the loan gets taken out of the portfolio.
This process is useful for both the issuer and consumer. The issuer receives far more from the portfolio then it had expected, and it helps consumers rid themselves of a portion of their financial obligations.
The best example of this process was given by Managing Partner Greg Thorpe, using a $200 million portfolio. Typically, a loan in a fire sale would receive only five cents on the dollar, which would amount to around $10 million for the entire portfolio. Through verification, a payback of almost $80 million can likely be achieved. While the ultimate payout for the portfolio might end up being only $46 million, it’s still a far cry from the original $10 million the originator was expecting. “Historically, we’ve done 60% or better — under project and overachieve,” Thorpe said.
With the CCGI repayment program, “the ability of repaying the obligation on a plan really helps [consumers] not to impair their FICO score,” said Managing Partner Claudio Pannunzio. “At the same time, we are constantly informing the credit bureaus about the payment received, helping consumers to keep their FICO scores at a good level.”
This is combined by a paperwork-free process run through CCGI’s Web site. At the end of the process, CCGI works to get the consumer a new credit card, using the reliability of their repayment as collateral.
The platform should not be confused with a debt collection program since the resulting accounts in the portfolio become true cash assets, to be paid of in their entirety. Additionally, the goal of CCGI is to work with both the issuer and the consumer to achieve optimal results for both, and not to just facilitate another transfer.
In fact, the loans never change hands and are kept on the books of the originating institution, lessening the number of times the loan is worked on without being collected, therefore further minimizing the portfolio’s losses. “We don’t allow the transfer of the portfolio to our company either….you immediately impact the value of that portfolio if it’s transferred or sold again,” said Evans.
CCGI is attempting to “build a bridge between Wall St and Main St” Pannunzio said. By re-issuing assets, issuers get the loans off their books, and in turn, the consumers do not cause any damage to their FICO scores, and in many cases, even improve their score.