When regulators threatened a crackdown on the sale of nonperforming consumer loans to collection firms, and JPMorgan Chase (JPM) and Wells Fargo (WFC) promptly halted such sales, the industry's rapid unloading of bad assets seemed to be in jeopardy.
But bank sales of nonperforming commercial loans to collection firms will keep happening, according to parties on both sides of the transactions.
"The market right now is robust and pricing is getting better," says Jon Winick, president of Clark Street Capital in Chicago, which brokers the sale of distressed assets. "There are plenty of bad loans out there" to be bought and sold.
Noncurrent loans, as a percentage of total loans, fell 19 basis points to 3.41%, from the fourth quarter of 2012 to the first quarter of 2013, for all insured financial institutions, according to the Federal Deposit Insurance Corp.'s Quarterly Banking Profile. That figure has fallen every quarter since the first quarter of 2010, but the measure still remains well above the levels seen in late 2008.
Consumer debt sales are another story. The Consumer Financial Protection Bureau in recent weeks has said it will step up oversight of debt-collection firms and that it plans to hold banks responsible for the action of these third parties. The CFPB last month released bulletins showing it's looking at lenders, debt buyers, debt collectors and law firms that sue on behalf of banks.
BBX Capital, which was created when BankAtlantic Bancorp's thrift was sold to BB&T (BBT) and BankAtlantic's remaining assets were renamed, intends to enter the field of buying debt and pursuing collections through litigation, Vice Chairman Jack Abdo says. BBX is in talks with several banks about buying nonaccrual commercial loans and the Fort Lauderdale, Fla., company will not alter its plans as a result of the CFPB's actions, he says.
"This is a very sophisticated arena," Abdo says. "The market, it's still pretty big. Banks still have lots of these defaulted borrowers on their books."
Other executives in the collections industry expect that the CFPB will keep its distance from commercial debt, and will limit itself to the oversight of consumer debt, like credit card loans and auto loans.
"It does not appear that the CFPB will be heading in the direction" of policing commercial debt collections, says Mark Schiffman, a spokesman for ACA International, a trade association for collections agents, including firms that collect commercial debt.
Winick says that "while it can get blurry at times," commercial debt is acquired by "sophisticated borrowers" and policymakers won't get involved in that market.
The CFPB has enough battles to fight and would be uninclined to test the limits of its jurisdiction this way, Winick says. "I doubt there would be significant mission creep," he says.
Indicating the level of interest, several banks conducted bulk sales of nonaccrual commercial loans in the second quarter. United Community Banks (UCBI), a $7.2 billion-asset company in Blairsville, Ga., conducted a bulk sale of $131 million of classified assets. First BanCorp. (FBP), a $12.8 billion-asset company in San Juan, Puerto Rico, closed a bulk sale of $128 million of nonperforming residential assets.
Other bank executives say they expect to continue to pursue bulk sales the remainder of this year.
"On the commercial side, the nonperforming loans, we are selling off REO," William Cooper, chairman and chief executive of $18.4 billion-asset TCF Financial (TCB) in Wayzata, Minn., said during a July 23 conference call to discuss second-quarter earnings. "We are able to sell a lot of our nonaccrual assets and expect to see continuing improvement in that area."
BBX made a big collection on commercial debt in June, when it reached a $44 million settlement with a real estate developer, Daniel Catalfumo, who had a number of loans with BankAtlantic. Catalfumo's loans were transferred to BBX on the sale of BankAtlantic to BB&T, and BBX had been pursuing collections through litigation.
Through its experience with the Catalfumo cases, BBX Capital decided that the acquisition of commercial debt and pursuing collections is an appealing business line, Abdo says. BBX Capital had not initially planned to buy problem loans when it was spun off from BankAtlantic, he says.
"We are looking to buy assets that we can pursue from banks that really don't want to do it themselves," Abdo says. "They don't want to dirty their hands. They don't have the stomach for the legal costs."