One of the models used to forecast the timing of future collections is the “Collection Curve Method.” It was developed by this country’s most successful credit card debt buyer and the founder of the largest, best trained, most profitable collection agency in the world, Commercial Financial Services (CFS).
The “Collection Curve Method” is one of several models based on the original experience of CFS (now CFS II). The model was used in times when the nation was experiencing a high unemployment problem that is expected to last for a prolonged period of time, similar to our current employment situation. What this model does is break down the collection cycle based on the following criteria:
- The number of loans purchased
- The acquisition cost of the portfolio
- Time periods
- The number of months in each time period
- Forecasted collection percentage in each time period
As an example lets say Ropay Asset Investors goes and buys a portfolio for $50,000. Based on the acquisition cost, Ropay will assume the following:
- The number of individual loans purchased will be between 150-500
- There will be 4 time periods of collection
- The number of months in each time period will be 4 months
- The forecasted collection percentages during each period (1st 25%, 2nd 40%, 3rd 20%, 4th 10%)
Based on our targeted recovery of 3 times our acquisition cost our total Estimated Cash Recovery (ECR) would be $150,000 We expect to collect $37,000 in the first period (25% of ECR); $60,000 in the 2nd period (40% of ECR); $30,000 in the 3rd period (20% of ECR); and $15,000 in the 4th period (10% of ECR). The total collection cycle will take place over a period of 16 months.
See part two of this post for further discussion.