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

Part I

At the height of the Great Recession—the fourth quarter of 2009—banks charged off 3.1% of all loans,¹ resulting in a net loss of nearly $51 billion in that quarter alone.² Over $27 billion of the 2009 fourth-quarter charge-offs came from loans secured by real estate,³ and another $8 billion came from commercial and industrial leases.⁴ Very soon after, in the first quarter of 2010, banks charged off another $21.6 billion in loans made to consumers.⁵ The time has come to tap this important revenue source.

This three-part E-Alert will describe the opportunities banks now have to recover valuable charge-offs, and how Stites & Harbison's ("S&H") experience, resources, and knowledge can maximize collection efforts.  This week's E-Alert will explore opportunities for recovery of Recession charge-offs and highlight some of S&H's successes in collecting these.  Parts II and III will examine the tools S&H uses to ascertain whether borrowers have sufficient assets to justify recovery efforts, the dangers of tolling statutes of limitation and opportunities to recover charge offs under international laws.

An astonishing $335.5 billion in loans has been charged off since the start of 2008, and only $40.6 billion of that amount has been collected.⁶ Accordingly, banks are now sitting on over $294.8 billion in valuable charge-offs.  Moreover, as the economy improves, charge-off rates have dropped dramatically and returned to pre-Recession levels.  In the first quarter of 2014, the charge-off rate for all loans was only 0.5%—the same as in the first quarter of 2006.⁷ Not only are these recent statistics positive for the current health of the banking industry overall, but they also indicate a key turning point in the economic stability of individuals and corporations.  While most banks were preoccupied with recovering the collateral that secured loans immediately after the Recession hit, banks can now turn their attention to recovering the rest of the outstanding loan balances.

It is likely that many individuals and corporations whose loans were charged off in the Recession now have improved ability to repay these loans.  Many borrowers may unfortunately confuse charged-off loans with forgiven loans; however, banks have the opportunity to access a rewarding source of income by recovering charged-off loans.  For example, in March 2014, Crossroads Bank (a wholly owned subsidiary of FFW Corporation) announced a $2.6 million recovery on a loan that the Bank had charged off in 2012.⁸ The charge-off recovery completely satisfied the borrower's obligation.

Similar to Crossroads Bank, S&H has had many examples of success in collecting charged off loans for clients.  Recently, S&H has recovered the following debts:

• S&H collected three charged-off debts for a total of $1.5 million by obtaining charging orders and writs of execution against the debtors.  A previous collection firm had failed to collect the debts; however, S&H was able to recover the money for less than $10,000 to the client. 
• S&H sued on behalf of a banking client to recover two outstanding notes totaling $1 million.  In response, the debtor attempted to transfer his million-dollar home to an LLC to avoid the judgment.  Seeing through his tactics, S&H successfully sued for fraudulent transfer.  The debtor settled the case by transferring the property to the bank in lieu of the debt.
• S&H collected $1.5 million from a debtor in Paris, France, by enforcing a Kentucky judgment against the debtor pursuant to the Hague Convention and seizing the debtor's  real estate located there.
• After having the local sheriff execute an agreed judgment on major pieces of equipment, S&H obtained over $200,000 in past due payments for its client without having to conduct a sheriff's sale.

Thus, banks are currently sitting on valuable loans charged off in the Recession that are ready to be collected now that the economy has begun to recover.  Roughly $294.8 billion remains uncollected, and recovery of even a fraction of these charge offs would materially increase bank revenues.  Next week, Part II of  the series will focus on the tools and resources S&H utilizes to achieve results like the ones described above.

¹Charge-Off Rate On All Loans, All Commercial Banks, FRED ECONOMIC DATA (last updated June 2, 2014).
² Net Charge-Offs On All Loans And Leases, All Commercial Banks, FRED ECONOMIC DATA (last updated June 2, 2014).
³ Net Charge-Offs On All Loans And Leases, Secured By Real Estate, All Commercial Banks, FRED ECONOMIC DATA (last updated June 2, 2014).
⁴ Net Charge-Offs On All Loans And Leases, Commercial And Industrial, All Commercial Banks, FRED ECONOMIC DATA (last updated June 2, 2014).
⁵ Net Charge-Offs On All Loans And Leases, To Consumers, All Commercial Banks, FRED ECONOMIC DATA (last updated June 2, 2014).
⁶Statistics on Banking, FDIC, (last visited June 27, 2014).
⁷Charge-Off Rate On All Loans, All Commercial Banks, FRED ECONOMIC DATA (last updated June 2, 2014).
⁸ Press Release, FFW Corporation, FFW Corporation Records $2.6 Million Loan Charge-Off Recovery (Mar. 21, 2014).

Co-authored by: Robin Frazer, Summer Associate

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.