Bail Bonds Part II – Is The Business Doomed?

bail_bondsI wrote recently that what I learned about bail bonds companies made me appreciate them, at least from my capitalistic “that’s an interesting and possibly profitable way to make money” perspective.

That doesn’t mean I’m deaf to other arguments, against the industry. Those arguments have gotten louder recently, to the point that bail bonds businesses in places like Houston, and the entire state of New Jersey for that matter, face an existential threat right now. They may not survive.

If you don’t work in and around the bail bonds industry, you might not already know that a recent judge’s ruling is killing them in Houston.

At the end of April Chief District Court Judge Lee Rosenthal ruled that all defendants accused of misdemeanor offenses in Harris County (where Houston is) must be released from jail within 24 hours. The ruling went into effect this summer in Harris County, pending resolution of a lawsuit, expected in October.

The practical effect of the ruling is to make all misdemeanor defendants eligible for bail through county-supported pretrial services or a Sherriff’s bond, thus avoiding the need to pay for a more costly private bail bond.

That, plus the expansion of Harris County’s pre-trial services to respond to the ruling, has caused the elimination of 80 percent of the private bail bonds business, according to John McCluskey of Action Bail Bonds in Houston. He believes all of his fellow bail bonds competitors in Harris County have seen a similar catastrophic drop-off in their business. According to McCluskey, they’re pretty much dead.

Let me break down the arguments about bail bonds, pro and con. Proponents and opponents of commercial bail bonds cite the same three important factors, but come to completely opposite conclusions about the proper role of private bail bonds versus what we might call the ‘public option,’ made up of a nearly-free County-supported pre-trial services’ “personal bond,” or another free public-option, called a Sherriff’s bond.

Among both pro and con camps, the three agreed-upon factors to argue are:

  1. Fairness – Is it fair that people are released from jail awaiting trial, or not, based on whether they can afford bail, or not?
  2. Public Cost – Are taxpayer resources being used appropriately?
  3. Public Safety – Do bail conditions adequately prevent accused criminals, awaiting trial, from re-committing crimes? And which method best guarantees that people show up in court to face justice?

What opponents and proponents don’t agree on is the data, the other side’s use of data, or the meaning of that data. As a finance guy, the second issue, public cost, caught my eye in particular.

In conversations with three different bail bonds owners in Texas, plus a fourth expert who has done consulting work for the industry, I heard them proudly represent a private-sector solution to the public-sector problem of ensuring court appearance for trial, thereby saving taxpayer dollars.

Requiring a defendant to pay for his release, bail bondsmen say, saves taxpayers from taking the financial risk of their eventual return to court. The cost of monitoring defendants falls to bail bondsmen as well, not county employees. Finally, if a defendant fails to show up for trial, bondsmen say, the cost of collecting them doesn’t hit the county taxpayers.

In a narrow sense, taxpayer costs will go up in response to the recent shift to the public pretrial option for bail, the Houston Chronicle reported, as Harris County pretrial services hired a dozen new positions.

Mike Lozito, Bexar County’s head of pretrial services, estimates that he would have to triple his current staff of 71 to completely handle all bail cases, were Bexar County to go a similar route. Partly to avoid that additional public burden, Lozito told me, he welcomes the private/public partnership between pretrial services and the commercial bail bonds industry.

Yet, opponents of status quo commercial bail system make bigger, and ultimately more profound, cost arguments.

As Matt Alsdorf of the Laura and John Arnold Foundation told me, the narrow cost issue of bail bondsmen versus pretrial services does not accurately capture the true public expense of private bail.

As Vice President of Criminal Justice at the Foundation, a think-tank at the forefront of challenging the commercial bond industry, Alsdorf argues that we need to take into account the total cost of incarcerating people. Keeping penniless defendants in jail because they can’t post bail costs the public between $75 and up to maybe $300 dollars each night per person, depending on estimates and jurisdictions, according to Alsdorf.

US Senators Rand Paul (R- KY) and Kamala Harris (D-CA), argued in a recent New York Times editorial that 450,000 people sit in jails nationwide because they cannot make bail. They estimate this failure to afford private bail costs the nation an additional $14 billion more per year in an expanded jail population.

Further, as Alsdorf point out, the impact of losing out on employment, or disrupting families, makes extra time in jail an economic catastrophe for people least able to endure that hit. That economic hit may appear justified to some people, because it “punishes arrested people,” but it also would seem to encourage an ongoing cycle of poverty, which probably costs the public far more in the long run.

Facing the right-left alliance of Senators Rand and Harris, think-tanks like the Arnold Foundation, and civil rights groups like the one that brought the Harris County lawsuit, bail bonds companies ought to be very nervous. Could the Houston-area lawsuit spread to the rest of Texas?

As Bexar County’s public defender Michael Young explained to me, not right away, but maybe over time.

“It is true that there is a federal lawsuit pending in Harris County dealing with personal bonds and misdemeanors specifically. It is my understanding that the ruling in Harris County is specific to the facts presented in that case, so therefore any ruling wouldn’t automatically be applied to another county in Texas. However, the legal reasoning of the federal judge could be applied to any county, and could result in a similar ruling, in future cases”

I’ll interpret this to say, over time, follow-up lawsuits could eliminate private bail bonds in cities and counties all over Texas. As private businesses they might be dead men walking and not yet know it.

Please see related posts:

Bail Bonds I – An Interesting Way to Make Money

 

 

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Bail Bonds Part 1 – The Business

Like all of my favorite finance topics, this one was inspired by my daughter’s question, as we slowly drove in the car past the county correctional facility: “Daddy, what are bail bonds?”

Prior to her question, my knowledge of the industry came from watching Robert DeNiro in Midnight Run. Fun movie.

I tried to answer as best I could. “Well, first you need to be arrested for a crime. Then, you really don’t want to spend much time in jail waiting for your trial, so the judge says you have to pledge money to guarantee you’ll return for trial later. But then, you don’t have enough money to pledge. Worse still, you don’t know anybody who has enough money to pledge. So you walk into a bail bonds company trailer…”

Then I kind of got lost, thinking as a banker might, trying to underwrite this financial risk. I’m imagining how awfully risky this must be on the business side. Criminal defendants. With no money. Also, no collateral. That is a rough way to lend money, compared to a bank.

Oh, how I was wrong. Having sat down with bail bondsman David Fernandez of Jailbusters Bail Bonds, as well as Susan Monsalvo of Express Bail bonds, both of Bexar County, I’ve come to a few opposite conclusions.

First, I could see how bail bonds might be very profitable; even more so than a traditional bank.

Second, the underwriting of bail-bond financial risk harkens back to some old-school lending criteria that traditional banks won’t or can’t do anymore.

bail_bondsLet’s talk about the potential profitability first. A typical bail bond company charges a 10 percent fee to customers, meaning if a judge sets $5,000 bail, the defendant pays a $500 fee to the bail bond company, who pledges the $5,000 on his behalf. (I’m using the male pronoun for defendants because, duh, men commit most crimes.)

When the defendant shows up in person for trial, the bail bond company’s $5,000 risk is released and the bail bond business keeps the $500 fee. Now, the first thing to notice about this deal is that any finance company that can earn 10 percent on its capital for just a few weeks or even a few months of financial risk has the potential to earn an extremely high annual rate of return on its capital. This sounds potentially very profitable.

But wait, that’s not even the best part. Bail bond companies do not have to hand over the $5,000 in pledged money to the county court. In the vast majority of cases, no money ever changes hands. The bail bond company just takes the $500 fee upfront and pledges money for the future, in case the defendant skips bail. In the meantime, it keeps the money. A huge advantage.

This, you should notice, is a way better deal than what a typical bank gets. Banks have to actually give their money over to borrowers, and if all goes well they only get their money back slowly, with interest, over time. The fact that bail bond companies only virtually pledge money, but in fact don’t give any money, is pretty awesome for bail bonds businesses.

There’s even more coolness. Bail bond companies, in order to get and keep a license to do business, have to prove that they have assets, either in cash in the form of a bank CD, or in property. Their license typically allows them to underwrite bail bonds up to ten times the value of their proven cash assets. This creates what a finance nerd like me would call leverage.

One of the magic tricks that traditional banks get to do is called “fractional reserve banking,” in which a bank lends out many more times in money than it ever actually has in capital, sometimes close to 10 times its capital. Bail bonds companies get to do pretty much the same thing, because if a bail bond company has a $100,000 cash CD, its license allows the company to underwrite up to $1 million in bonds.

Finally, there’s the underwriting process, which I mistakenly assumed would be extremely difficult. Actually, according to both Fernandez and Monsalvo, they use a combination of personal judgment and reliance on the accused’s mom to take appropriate risks. That’s right, more often than not, mom (or another female significant other) is the co-signer on the bond.

Regular banks don’t do this kind of touchy-feely thing anymore. With traditional banks, it’s all algorithms, credit scores and heartless, technology-based lending.

With bail bonds, the owner often has to take a leap of faith, engaging in a sort of character-based lending. Often that’s Mom’s character. Or Grandma’s. See? This is just like George Bailey in “It’s a Wonderful Life,” or like “Leave It To Beaver” type lending.

An additional support for this type of old-school personal-judgment based lending is the preponderance of repeat customers in the bail bonds business. Fernandez of Jailbuster’s usually ends his discussion with customers with the admonishment: “I don’t want to see you again,” but of course he does see them again. A combination of repeat customers and personal referrals make up the majority of his business, according to Fernandez.

Monsalvo of Express Bail Bonds describes working with her father’s criminal defense attorney business and later her mother’s Express Bail Bonds business, where “as a result I know multiple generations of [her father’s] customers. In some cases the grandfather, father, and son. Or I might see a customer who I knew in diapers and think, like, I remember you as a baby.”

If that doesn’t warm your heart, I don’t know what will. Shouldn’t we all start a bail bonds business together?

Now that I’ve helped you, like me, fall in love with the business of bail bonds, I need to warn you about the bad news for the business. 2017 so far has proved to be a terrible horrible no good very bad year for bail bonds in cities like Houston, and in states like New Jersey, where they’ve practically been banned. More on that in a follow-up, on the threats to the business.

 

See related posts:

 

Bail Bonds Part II – The Threats to the industry

Pawn Shop Audio Interview Part I – The Unbanked

Pawn Shop Audio Interview Part II – Fighting the Good Fight

 

 

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