The Implications of an Expanding Repo Industry
Led by automobiles, the repossession business is poised to enter five relatively fat years following five lean years, bolstered by a stronger economy, greater sales of new vehicles and increased lending to borrowers with less than perfect credit, according to a new report.
Repo companies that do their business “the right way” – i.e., by complying with stricter federal regulations and lender oversight – are likely to take a greater share of the expanding business.
A new research report from IBISWorld forecasts annual revenue growth over the next five years of 4.3%. While that growth rate might not seem like anything to get too excited about, it’s a sharp turnaround from the previous five years, when industry growth dropped by 6.2% each year.
The report, written by IBISWorld analyst Maksim Soshkin, forecasts industry revenue of $1.1 billion in 2019, up from $914.2 million this year, a cumulative 24% increase.
Following the recession, when an increase in loan defaults and delinquencies caused repossession rates to soar, the number of consumers defaulting on their loans bottomed out, the report said. “Consequently, demand for industry services collapsed as repossession rates fell.”
More recently, it notes, the industry has slowly begun to recover. “The strengthening economy has started to boost demand. As disposable income levels have risen, consumers have begun to increase their purchases, while creditors have expanded financing. As a result, loan volumes have increased and the overall number of delinquencies has climbed, though the share of delinquent loans has contracted. Consequently, repossession rates have increased and demand for industry services has increased.”
“In particular, the recent surge in subprime auto loans has resulted in more car repossessions,” the report says. “The resulting increase in the number of loans will lead to higher number of delinquencies, resulting in increased demand for industry services.”
The report also forecasts a rise in the industry profit margin from 20.4% in 2014 to 22.4% in 2019. “Increasing demand for industry services will lead to increased repossession rates, driving up profit per job. Moreover, as the economy improves, fewer people will become part-time or self-employed repossession agents. Consequently, competition is expected to decline, leading to higher profit margins.”
Repo company executives generally agree with IBISWorld’s assessment.
“The automobile industry is on the upswing. That will mean the repossession industry will be on the upswing. It’s a numbers game,” says Jerry Wilson, president and CEO of Premier Adjusters Inc. in Houston and vice president of the American Recovery Association, a repo industry association. Nevertheless, he characterizes industry growth as “baby steps.”
Robert J. Stankovitch, president, of Peak Service Corp. in Cinnaminson, NJ, says business has actually been improving since 2012, as more banks and credit unions have gotten back in the auto lending business.
Both men also agree with IBISWorld’s assertion that smaller players are likely to be driven out of the business, leaving more of it to the bigger actors.
“The last three years a lot of people saw a lot of grandeur and a lot of money in this industry, and a lot of young people got into the business,” Wilson says, driven to some degree by the lure of reality television shows like Operation Repo and its many imitators. However, he says those one-truck operators and even bigger “mom-and-pop” outfits will have a hard time operating in this new world, where complying with Consumer Finance Protection Bureau regulations is critical.
Those smaller players, Wilson says, “cannot meet the criteria that lenders are demanding to stay in compliance with the CFPB. The banks are under tremendous scrutiny from the CFPB and they are going to make sure their subcontractors, like me, are compliant. They have carte blanche to do audits on me at any time. Clients are so scared that they don’t know what the CFPB wants, so they double-up to be safe.”
“Over the past few years, I’ve had more lenders come out for surprise inspections looking at our facilities, how we handle personal property, looking at our equipment and staff,” Stankovitch says. “If that’s what the CFPB is concerned about, I’m happy; that’s going to help us. They’ll go back to using the bigger, better operators that are doing everything in compliance.”
Compliance Challenges
According to Stankovitch, among the things the CFPB – and therefore compliant auto lenders – will demand from repo companies are:
- Annual financial statements.
- Proof that the facility is secure, including the vehicle, keys and the borrower’s personal property.
- Proof that sensitive personal property (e.g., someone’s divorce papers) are disposed of properly (i.e. shredded and not merely thrown in a dumpster).
- Proof that the company has a disaster recovery plan in place.
- Proof that company information is saved and backed up.
“The smaller players cannot comply with that. It costs a lot of money,” Wilson says. “They will never be able to be compliant and work for the large lenders. Everybody sees a lot of money in the repossession business but they don’t take the contingent liability into consideration.”
While Stankovitch is hopeful that these stricter compliance rules will mean more business will go to “bigger and better” operators like his company, he’s circumspect about whether or not repo towing rates will necessarily rise in tandem.
Over the past few years many big banks have shifted their repos to “forwarders” and “facilitators” who now handle more than half of the industry’s needs. These firms then farm out the jobs to individual tow-truck operators, essentially the lowest bidders. That has kept repo fees at levels common 20 years ago.
“Prices for repossessions are going to have to increase if [lenders are] going to have to use better operators,”Stankovitch says. “You pay for what you get. If you want the people who are doing it the right way, there’s a cost to that. There’s an increased cost to compliance. Something’s got to give.”
