Spain Debt Collectors in Top Hats Adopt New Guise for Growth

(Bloomberg) -- Debt collectors in tailcoats and top hats or disguised as clowns and bullfighters were a common sight in Spain during the financial crisis, chasing deadbeats and shaming them into repaying what they owed. 

Now, an economic rebound and greater scrutiny are changing the debt collectors’ business environment. One firm, El Cobrador del Frac is broadening its services by offering funding to clients while also collecting debts.

Shaming of debt defaulters is a practice that dates back to medieval Spain when late-payers were paraded through the streets on donkeys while wearing cone-shaped hats. The modern-day version has firms sending out agents to collect debts dressed in a medley of outfits from monks to Roman legionaries.

An economic recovery that’s driving down loan defaults and legislation that curtails such humiliating practices are now challenging that tradition.

“They face new pressures they’re not used to and will have to adapt,” said Pere Brachfield, a professor of credit management who also runs Pere Brachfield Credit & Risk Consultants in Barcelona. “It’s a new world for them.”

Madrid-based Frac has turned to factoring, buying unpaid bills to give customers access to immediate funds to run their businesses, said Daniel Ocana, its legal director. The firm earns its money by recovering the underlying unpaid debt.

Fewer Defaults

Companies such as Frac that use costumed collectors operate on the fringes of a debt-recovery industry in Spain that numbers about 1,000 companies, said Jose Ricardo Cadena, chairman of Spain’s National Debt Collection Association. His organization represents about 10 percent of the country’s debt collection firms and they have undertaken to regulate themselves given the lack of formal legal oversight, said Cadena, who is chief executive officer of Cabot Financial Spain.

Things have improved for Spanish borrowers following a financial crisis that peaked in 2012 when the government was forced to seek a 41 billion-euro ($50.6 billion) bailout to succor a banking system over-burdened by soured real estate debt.

The amount of defaulted loans in the economy, which reached almost 200 billion euros at the start of 2014, has now almost halved, according to Bank of Spain data. The central bank estimates the economy will grow 2.4 percent this year, extending an expansion that began at the end of 2013. Bad loans as a proportion of total loans have dropped to about 8 percent from a peak of nearly 14 percent in 2013.

Namibian elephants

For a debt-collection industry that’s clearly linked to the ebb and flow of Spain’s economy, the return to the good times has advantages and disadvantages, said Ocana in an interview in his Madrid office adorned with hunting trophies including the mounted tusks of Namibian elephants.

While periods of economic distress boost demand for his company’s services, it can get easier to recover unpaid debt as money starts to move more freely in times of recovery, he said. The number of debt collectors on Frac’s payroll now stands at about 80 compared with 180 at the peak of the crisis in 2012.

“Even though it is half of what it was, the amount of defaulted debt is still equivalent to 10 percent of Spanish GDP,” said Brachfield. “So there’s still a lot left to collect.”

No Harassment

A new source of pressure for firms like Frac comes from a change to Spain’s penal code in 2015 that made stalking-like activity a crime, said Brachfield. The law has clear consequences for firms that use harassment as a tool to collect debt, he said.

Another concern for debt-recovery firms comes from the need to comply with tough new European Union rules on privacy that apply to all companies that hold and process data, said Cadena.

“The way to enforce the rules is by imposing very high fines -- and this is what this new regulation will do,” he said.

The changes won’t affect Frac because it operates within the law, said Ocana, adding that the firm seeks to resolve debt recovery situations without deploying agents in uniform.

“We have court rulings that have permitted the debt recovery to be carried out by what we call the uniformed agent -- that’s to say the man who goes dressed in a tailcoat,” said Ocana. “What we use most are agents that are not uniformed.”

‘Eternal Fraudsters’

The courts have been slow to apply the new law and many non-payers still haven’t heard of it, said Pablo Camacho, manager of The Late-Payer’s Defender. Camacho worked briefly as a lawyer for Frac before leaving to set up a firm advising debtors being pursued.

“Their modus operandi is going to continue just as before with the black cars and knocking on doors,” he said.

Frac is able to start offering financing to customers because it can use its own database of defaulters built over 30 years, said Ocana. No matter how well or badly the Spanish economy is faring, there will always be work for companies like Frac because hardcore deadbeats are never going to disappear, he said.

“The profile is always the same -- he is a professional who doesn’t pay, who lives very well, who has nothing in his name and is a true fraudster,” said Ocana. “He is eternal.”

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net.

To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net, Frank Connelly

©2018 Bloomberg L.P.