One effect of the financial crisis and uneven recovery is the huge amount of loan and lease charge-offs that banks have taken against loss reserves.
The good news is that the total loan and lease charge-off rate has steadily declined since peaking at 3.04 percent in the fourth quarter of 2009 – it was down to 1.68 percent in the second quarter of 2011 (seasonally adjusted). Given this, there may be opportunities now and in the near future to recover some of the charge-offs your bank has taken over the past few years.
Keep in mind that problem borrowers are like phoenixes: They often rise from the ashes. So establishing a robust charge-off recovery operation now could pay off handsomely in the form of hundreds of thousands (if not millions) of dollars in loan recoveries. It’s not unusual for banks to recover 15 percent to 25 percent of charged-off loans after a recession.
Depending on the amount of your bank’s loan and lease charge-offs, you could hire someone internally who specializes in this or retain an asset recovery firm to pursue charged-off loans. In previous downturns, this type of cottage industry has emerged, and the severity of this downturn may present even more opportunities.
Some asset recovery firms buy portfolios of charged-off loans, while others take a percentage of the debt they recover. Here are two important points to keep in mind with regard to recovering charge-offs:
- If you negotiate a charge-off as part of a debt resolution by writing down a portion of a borrower’s outstanding debt, be sure to negotiate a mechanism for recovering the charged-off debt under certain circumstances in the future.
- Recovering any portion of a charged-off loan will add to your allowance for loan and lease losses (ALLL) – even if you never make a charge to the provision for ALLL. This will bolster your capital ratio and also minimize the need for additional ALLL provisions.
For more details on recovering charge-offs, please contact our office.