The ripple effect: Distressed repo industry threatens lender losses

Auto loan losses are poised to rise — but not because consumers are failing to make payments. The issue runs deeper, hinging on repossession agencies bogged down by increased competition and rising costs.

Repossession companies, typically family-owned businesses passed down through generations, are succumbing to industry challenges. Florida, for one, has lost 23% of its licensed repo agencies, and California has 67 fewer than in 2016. Paradigm Recovery President Bryanna Cox estimates that 22% of repossession companies have shuttered operations in the past four years.

“We are seeing signs today, and that’s devastating for us,” said Les McCook, executive director of the American Recovery Association, which represents 260 repossession agents spanning 27,000 cities worldwide. McCook took to the stage at the ALS Resolvion Innovations in Recovery conference in Dallas to expose a crumbling part of the industry that stands to ripple through the finance sector.

Shrinking margins and rising operational costs are preventing new agencies from opening and are reducing the number of vehicles being respossessed, explained Jose Mendiola, former president at ALS Resolvion — which merged with Del Mar Recovery Solutions in November to become Resolvion — an industry forwarder that works with lenders and repo agents. “The longer-term effect is higher losses for lenders, which in turn will impact pricing on future loans,” Mendiola said, adding that consumers will ultimately pay the price.

With only a couple A-rated insurance carriers left in the repossession industry, repo agencies struggle to secure and retain coverage. The biggest challenge for AL Recovery is limited access to insurance. “Our insurance is astronomical — almost disgusting,” said owner Michael Pletz. “Now we’re down to two, possibly three, companies depending on where you are, and it isn’t getting any better,” he said.

Smaller companies are most at risk, McCook said, noting that insurance costs can be as much as 60% higher than for larger companies. “There’s a possibility — it’s really looking ugly in California — that the insurance carrier won’t even be able to insure our industry in California in the next year and a half,” McCook noted.

Rising Costs, Shrinking Margins

Meanwhile, repossession agencies struggle to keep up with the rising cost to operate, especially as lenders reduce repo fees. Technological innovations connecting forwarders, lenders and repossession agents in the field are reshaping the industry. They have mitigated compliance risks, but they come at a cost.

“These initiatives have driven the cost of managing repossessions higher than ever before,” Mendiola said. “It’s disappointing that we haven’t seen more of an understanding from lenders” about shrinking profits, the “serious issue” with insurance, and the dwindling pool of repo agents, he added. “At some point, something has to give,” Mendiola said.

In the past three years, compliance costs have doubled, Paradigm Recovery’s Cox said.

Technology investments, too, are weighing on repo companies. “The cost of technology is incredible, but you have to have it to keep up,” Cox said, adding that the company’s overhead has increased tenfold since 2017. “That has a lot to do with the fact that we’ve grown, and growth costs money, but unless you’re growing in this industry, you’re going to go out of business — there’s no grey area.”

Meanwhile, Paradigm Recovery’s profit has remained “completely stagnant or, if anything, it has decreased,” Cox said. For example, one client used to pay $375 per repo, but in the past two years, that figure has been shaved down to $300 — with increased compliance demands that cost $1,500 per year.

On average, Paradigm recoups between $30 and $38 per repossessed car. “Now, that’s how many repos times $30 just to pay for compliance every single year?” Cox asked.

However, some lenders and forwarders shared a different view. Mark Medrano, assistant vice president of recovery at Veros Credit, said the industry got overcrowded. “Like every other business, the repo agency world got saturated, and that’s where the price-cutting happened,” Medrano said. “One agency would say, ‘I could do it better, and I could do it cheaper,’ and of course we would have to try it because we’re going to save costs on a mass level. It’s an economics formula, that’s all it is.”

Mendiola blamed some of the issue on market maturation. The past decade has seen small repossession agencies struggle, and fail to keep up with increasing technological demands and compliance standards, he said. “I’m not saying there weren’t a lot of really good agents, but there were also really bad ones,” he added. “During the process of that cleanup, it’s been hard on some of these [agencies],” Mendiola said.

Risk Versus Reward

Prior to the formation of the Consumer Financial Protection Bureau in 2011, the repo industry was often described as the Wild West, with lenient rules and limited regulation. Since 2016, though, the industry has been under scrutiny, and has been cited as a CFPB focus at least once per year.

Even so, repossessors face risks, and subsequent losses, out in the field. Corey Cox, president of repo agency Asset Resolutions and husband to Bryanna Cox, said one to five accounts are closed every week due to a breach of peace. But the risk goes beyond the recovery of the vehicle.

The handling of personal property — items that repossession agencies are responsible for cleaning, holding and disposing of — is challenging and costly. “Would you want to stick your hand in a seat of some car where there was white powder all over the seat?” Bryanna Cox told lenders at the ALSR conference in September. “You don’t know if it’s fentanyl or flour — and what if you get stuck by a needle and get HIV? Guess who has to pay for those medical bills? Us. It is a danger no one discusses, and it’s present every single day.”

The total estimated cost for one office and lot location for Paradigm Recovery’s personal property operations is $4,849 per month, said Bryanna Cox, noting that 85% of the time, the company receives zero compensation for this service.

AL Recovery’s Pletz said reasonable payment for the handling of personal property falls in the range of $75 to $100 per car, according to results from an online survey of repossession agents.

“If you want to keep the viability of the business model we’re doing today, someone has to stop and pay attention to what’s happening on the other side of the fence,” ARA’s McCook said. “This is [the lender’s] property, basically. I say you’re partly responsible for it, so I think there should be some care and consideration as to what’s going on in our world.”

Editor’s note: This article first appeared in the November issue.