Today I looked up the definition of "factoring" in all 8 editions of Black's Law Dictionary.
I was intrigued by the 1st edition definition of a "factor": A factor is an agent who, in the pursuit of an independant calling, is employed by another to sell property for him, and is vested by the latter with the possession or control of the property, or authorized payment therefor from the purchaser.
Black's current definition of "factoring" is: An asset restructuring arrangement that involves the buying of accounts receivable at a discount. The price is discounted because the factor assumes the risk of delay in collection and loss on the accounts receivable.
Let's look at what Black's says:
On the one hand, they define "factoring" as "
A factor is an agent who...is employed by another to sell property for him, and is vested by the latter with the possession or control of the property..."
That definition says nothing about
servicing the property if we are to note what comes later (factor as middleman). Rather, the definition here would be better summarized by "middleman" or "wholesaler" of goods; accounts receivable is property/goods, no less or more than, let's say, a house or car.
However, "classic" factors--who buy performing accounts receivable for cash at a discount--when dealing with accounts receivable, normally DO service the property they acquire. Reselling appears to be a minor part of the "classic" factoring operation.
Yes, I concede this is also true of the JDB, but with a difference: The JDB is collecting upon an asset that is of poor quality and the factors we have in mind don't touch those receivables.
Now, if the JDB in question is a debt broker? In that case, this definition does apply directly since they are acting as a "middleman" and don't service those accounts but acquire them strictly for resale.
I then read a few dozen recent cases, both state and federal, involving "factoring". Roughly 50% of those cases involved the purchase of accounts that were either delinquent at the time of purchase, or were sold merely to facilitate collection.
Factors do sometimes buy delinquent accounts, even those we refer to here as "traditional", I grant you that. However, if such a "traditional" factor does buy those accounts, they have analyzed the portfolio and have decided that those accounts can become productive; contract default does not necessarily lead to incurable delinquency. In this case, the OC's selling them to facilitate collection is simply a "time equals money" situation where they simply have determined they cannot take the time to get the money so they let the factor take the risk.
However, in the case of the JDB? These accounts are almost always incurable defaults (the OC has written them off as a "loss", either voluntarily or FDIC Rule 5000, depending on the type of debt and the creditor). The "discount" in this case is not "small", the purchase price is because of the high risk of loss on investment (even resale is problematic).
These accounts also are in collections and have been for some time and the OC did not think they would ever perform; most factorers would agree that those accounts likely won't perform once they are formally declared a "loss". Hence they won't touch them.
The JDB--at any level--will take the gamble and collect on them themselves for an extended period of time since their up-front investment is so low and the likelihood of payoff in the long run quite high. In other words, most JDBs are not primarily resellers and pass on their "duds" only after they have "bled them dry"...goods that are "blood out of a stone" quality to begin with.
If anything, recent case law suggests a defintion more in line with the sale of receivables, than the purchasing of receivables.
Considering that most JDBs don't sell debt as their main line of business, how in the heck can they list all their accounts as "factoring accounts" by that definition?
I sure hope that case law you have not taken the time to cite here can support your contention that a collection account, currently being "worked" by a JDB, can be reported as a "factoring account". After all, if they are "working" the account, it's highly unlikely they are selling it at that time and if SALE of receivables is the operative definition of "factoring"....
Definition of "accounts receivable factoring":
http://biztaxlaw.about.com/od/glossaryf/g/factoring.htmFactoring, or accounts receivables factoring is the selling of the business's accounts receivable to a factoring company. The factoring company (factor) pays the business a percentage of the value of the accounts receivable and deducts a fee for the cost of collections. Then the factor collects the receivables. One way to look at factoring is that a business is outsourcing its receivables collections process.
Does this look like Uncle Normie has us over a barrel? Maybe not: Note the missing element critical to a JDB: This definition implies that the invoices are "producing" and that the OC, rather than run their own collection department or assign debt to a contingency collector, sells the receivables for immediate cash.
A JDB buys receivables that have been declared a "loss" by the OC; nothing in the above definition includes these accounts. In fact, read the next quote:
http://sbinformation.about.com/od/creditloans/a/accountreceivab.htmAccounts receivable financing is the selling of outstanding invoices or receivables at a discount to a finance or factoring company that assumes the risk on the receivables and provides quick cash to your business. The amount of value assigned to the account depends on the age of a receivable. A more current invoice will pay more. Any accounts receivable over 90 days typically are not financed.
The reason is here:
http://www.12manage.com/description_accounts_receivable_factoring.htmlIn factoring, the most important risk assessment is in determining the creditworthiness of the debtors, not the seller.
Note that limitation: Any account overdue more than 90 days are typically not financed. Yet, what do JDBs (debt buyers) purchase? Accounts that, if they are ONLY 90 days old, are "prime" accounts...accounts that are likely to not yet be in the "pipeline". Yes, the definition does go on to say factors collect on the receivables they do buy, which are the least-risky collection accounts available and ones that, in fact, may be current accounts that never have seen the collection floor. All the factor does here is act as an outsourced "business office" for collectible receivables only.
JDBs are third-parties which specialize in collecting accounts that have become a liability ("loss") that the sellers don't want. The reason is that, by definition, the debtors tied to the accounts the JDBs purchase are NOT "creditworthy"; no "factor" worth a darn would risk their own funds buying these accounts.
Perhaps Uncle Normie's thoughts and arguments really are not dealing with factoring at all but a financing method known as "accounts receivable financing":
http://www.hjventures.com/factoring/accounts-receivable-financing.html[A]form of financing which uses accounts receivable as collateral for a loan. Accounts receivable financing is different than factoring in that the party providing the financing does not own the invoice and is not responsible for collecting the debt.
Also think this way: Note the word "invoice" that comes up so often. JDBs buy data files in bulk, not individual invoices. It seems it would be a stretch to call such massive data files "invoices"; the "bill of sale" between OC and buyer, a separate item, is an invoice, but not between the debtors and the parties to the sale.
If they were? Well, there would go one of our best defenses, wouldn't it?
