United States: Collecting Charge-Offs: A Valuable Source Of Revenue (Part Two Of Three-Part Series)

Co-authored by: Robin Frazer, Summer Associate

Part II

In this three-part series, Stites & Harbison ("S&H") is examining the opportunities banks have to recover the large amount of loans that were charged off in the Great Recession. Last week, the first part of the series described the scope of outstanding charged-off loans, the roughly $294.8 billion that stands ready to be collected, and the success S&H has had in assisting clients collect debts. This week, the second part of the series explains how S&H maximizes the recovery process for banks by utilizing its tools and resources to locate the borrower and ascertain the worth of the borrower's assets before instituting recovery efforts.

Banks may worry that it will be too difficult to identify those borrowers who have sufficient assets or income to make pursuing recovery worthwhile. Recovery of charged-off loans can be costly and time-consuming, and attorneys' fees are not well spent attempting to secure a judgment from an unreachable or insolvent borrower. However, recent developments in information technology have enabled S&H to easily ascertain the location of borrowers along with available sources of recovery.  S&H has the resources necessary to assist banks in making the recovery process as economic as possible.

A. LexisNexis Public Records Search

S&H has access to Lexis's Public Records search function. With Public Records searches, registered users such as S&H can search over 450 million individuals and 150 million businesses for information on their assets in the form of real property, vehicles, boats, and airplanes. Instead of painstakingly searching through various websites to obtain individual records, users can access the LexisNexis Public Records database where Lexis has collected all available forms of public records—including some not available on the open internet—into one convenient search engine. Although many public records, such as information from credit reporting agencies, are often protected for privacy reasons, access of the records for debt recovery is a permissible use that removes many of the privacy restrictions.

First, Lexis's Public Records search can aid banks in locating the borrower. The first step in any loan recovery is ensuring that the borrower can be found, and Lexis's Public Records search will often reveal the home address of the borrower. The simple search of an individual's name will disclose the address of any real property the individual owns. Additionally, the search can even reveal addresses of property that the individual rents, as long as the individual used that address to register on some public record or open a line of credit. Moreover, even if only an old address of that individual is known, Lexis utilizes "SmartLinx" to link reliable data points—such as social security numbers and birthdays—to reveal more current addresses. Similarly, SmartLinx will link spelling variations, nicknames, and maiden names to bring up current information for the individual.

Second, Lexis's Public Records search can aid banks in identifying the assets of an individual or business, including an individual's or corporation's real property and motor vehicle registration as well as any mortgages or loans taken out to purchase the property. The search will also disclose boats and airplanes that are required to be registered with the Coast Guard and Federal Aviation Administration. Lexis also provides access to tax assessments of real property that can aid in determining its current value. Additionally, the search will reveal any liens (including UCC liens) or judgments on assets. Thus, the LexisNexis Public Records search can reveal what property the borrower owns, an estimation of its value through tax assessments, and whether there are any existing liens on the property that would make recovery less likely.

B. Searches of Public Companies: EDGAR

For searching the assets of public companies, S&H can access the SEC's Electronic Data Gathering, Analysis, and Retrieval system ("EDGAR"). Publicly traded companies are required to periodically file forms with the SEC that summarize their assets, and these forms are publicly available online through EDGAR. For example, public companies are required to annually file a Form 10-K, which provides a comprehensive overview of the company's business and financial condition and includes audited financial statements. Additionally, corporate insiders—meaning a company's officers and directors, as well as beneficial owners of more than 10% of a class of the company's equity securities—must file with the SEC a statement of ownership, which discloses the amount of the company's securities that the insiders own.

Although the SEC filings are traditionally intended to inform shareholders about a company's health, these forms can also be used by banks to determine if the company has enough assets to pay back a charged-off loan or if the corporate insider has sufficient assets from ownership of the company's securities to justify recovery. Furthermore, similar to LexisNexis Public Records, EDGAR has a search function that permits users to search by company name, address, telephone number, and state of incorporation.

C. Searches of Private Companies: Dun & Bradstreet and PrivCo

S&H also has tools that can help ascertain the financial well-being of privately held companies. Through Dun & Bradstreet and its subsidiary Hoover, S&H has access to financial data on 237.7 million public and private companies. Companies self-report to D&B  and the specific information available company-to-company varies; however, D&B compiles the self-reported data with public records, the business's history, and related businesses within "corporate family trees" to create a comprehensive report of the financial health of the company.

Additionally, S&H can access PrivCo's financial intelligence of private companies to assist banks in the recovery process. PrivCo exclusively focuses on private companies, and companies in its database have annual revenues that range from under $10 million to over $10 billion. PrivCO employs a team of researchers that gathers and complies the "hard-to-find" data on private companies such as company financials, mergers and acquisitions, bankruptcies and restructurings, comparables to other similar private companies, and past IPO attempts. By accessing D&B's and PrivCo's extensive databases, S&H can investigate the assets of private companies and determine whether pursuing recovery would be worthwhile.

D. PACER

S&H also has access to court records through Public Access to Court Electronic Records ("PACER"), an electronic database that contains case and docket information about federal district, appellate, and bankruptcy courts. S&H can search a party's name and determine whether the party has been or is currently involved in any federal lawsuit. Additionally, if a borrower is involved in a federal lawsuit, PACER will reveal the cause of action, the nature of the suit, and the dollar demand involved. Accordingly, a quick PACER search can reveal if the borrower has received or is likely to receive a large judgment from another party, or conversely, if the borrower is embroiled in a number of lawsuits instituted by creditors seeking recovery of outstanding debts. Likewise, family court actions, such as divorce or child support proceedings, may disclose extensive personal financial information about the borrower.

E. Social Media and Google

S&H does not overlook the importance and usefulness of Google and social media webpages to acquire borrowers' information. Even in the short time since the Recession began in 2008, individuals have increasingly published details of their lives on all forms of internet pages and social media websites. Additionally, businesses often have social media accounts as well. A Facebook or Twitter post, Instagram picture, or a LinkedIn profile may reveal personal information about borrowers including the city where they live, their current job, pictures of their home or other assets, and much more. In this age of constant connection to social media, banks may be able to use the information that borrowers publicize online to determine if pursuing recovery of a charged-off loan would be worthwhile.

F. Private Investigators

Finally, for borrowers whose assets are particularly difficult to ascertain, S&H contracts with licensed private investigators. These private investigators conduct financial investigations that often reveal assets not included in credit bureau reports or public records searches. For example, the private investigators access investigative databases that reveal undisclosed assets held in another business's or business partner's name, search social media and financial information extensively, engage in surveillance that follows borrowers to business and banks to reveal hidden assets and unknown business partners, make inquiries to state and local government agencies about significant financial information not listed with credit bureau reports (such as building permits and contractor licenses), and conduct forensic examinations of financial and computer records in possession of banks or third parties. By contracting with these private investigators, S&H is able to estimate the assets of even the most secretive borrower.

Summary

As the economy improves, banks have the opportunity to recover losses from the loans charged off in the Great Recession. However, the process of recovery can be expensive, and it is important to first ascertain whether the borrower has enough assets to make pursuing recovery worthwhile. Advances in technology and internet searching have made ascertaining the likelihood of recovery from a borrower much easier, and resources such as LexisNexis Public Records, EDGAR, PACER, Dun & Bradstreet, PrivCo, social media searches, and private investigators often reveal the borrower's location and assets. S&H effectively uses all of these tools to maximize recoveries for its clients. Next week, the third and final part of the series will discuss why statutes of limitation concerns should prod banks to seek recovery now; and collecting charge offs in foreign countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.