Tuesday, April 01, 2008

Fraud or Simply Unethical and Foolish Subprime Lending

According to Reuters, the FBI is currently conducting approximately 1,300 mortgage fraud investigations, and it has established a new mortgage fraud website to facilitate their investigations, and in response to “public demand,” which of course is just another hey we’re doing something about it knee jerk response to the total collapse of the subprime lending industry.

While the FBI may find a few prosecutable mortgage lending fraud cases, what will mostly be brought to light by their investigations will be the foolishness of the underwriting guidelines utilized by the subprime lending industry, and the unethical, but not illegal, methods which were utilized to suck subprime borrowers in.

FBI says targets major insiders in mortgage probe

Posted by John Venlet on 04/01 at 11:17 AM
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Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 6 - Boiler Room Marketing

As I previously mentioned in Chapter 4, Bombardment of Easy Dollars, one of the most profitable marketing methods for subprime lenders was telemarketing to their own current customers (mortgagees).  The least expensive method of accomplishing this was simply for subprime lenders to utilize their own account executives as not only account executives, but as the telemarketers, and subprime lenders developed their own telemarketing methods which were almost textbook boiler room for their account executives.

Boiler room techniques have been described as high pressure sales, where as many sales people as possible are crammed into one space, and hundreds of phone calls per day are made to prospective clients.  Additionally, many boiler room sales operations randomly record many of the calls made to prospective clients, and, the performance of each telemarketer is closely monitored.  Just as was done in the subprime lending industry.  Two of the most closely monitored performance keys, in the subprime lending industry, were the number of calls made per day by each account executive, and, did the account executive follow the prescribed script.  If an individual account executive fell short on the number of prescribed calls per day, or failed to follow the script, dismissal was sure to closely follow.

Though many individuals associate boiler room techniques with the fraudulent sale of securities, the sale of subprime loans to less than credit worthy borrowers was by no means fraudulent.  Neither was the making of phone call, after phone call, after phone call, in search of a sale, fraudulent.  In fact, nothing about subprime lending, in and of itself, was fraudulent, though individual account executives working within the subprime lending industry could be prone to utilizing less than scrupulous practices to make a deal.

A typical subprime lending account executive’s day began with a sales meeting, just as is done in a typical boiler room operation.  The sales meeting agenda usually covered the previous day’s activity, reviewing each account executive’s call history; did he make those one hundred (100) phone calls?; the number of actual sales made, and some cajoling; so and so put together three deals, why haven’t you?; hyping of the current most popular loan product; this loan program seems to be selling better at the moment so let’s push it; and then ended with the rah, rah, rah get out there and hit those phones pep talk.  Classic boiler room activities.

After the sales meeting, of course, the dialing began.  The subprime lending account executives began the daily dialing grind, contacting prospective customer, after prospective customer, mouthing the scripted sales lines in the hope of landing a deal.

Is the prospect not at home?  Well, don’t bother leaving a message, because they probably will not call back anyway.  Does the prospect only desire to talk about what interest rates are available?  The account executive mouthed the scripted line that “we have many loan programs and interest rates to choose from,” but he needs to gather additional information so the best rate can be quoted.  Does the prospect not have time for this?  Then the account executive will end the call as quickly as possible, because there is no money to be made politely chit chatting.  Has the prospect been contacted previously and informed that there is no loan program available based on his credit score or other factors?  Well, things might have changed since that last contact, the prospect will be informed, and then asked if he minds if the account executive pulls their credit report, again.

If a prospect was initially eager to hear the entire sales pitch, and provided all the necessary data for an analysis of his credit and income, and was then presented with a loan option but hesitated to commit with the account executive, then a sales team leader would pick up the phone, dial the prospect up once again, and extol all the benefits of the loan, both actual and supposed, in an attempt to get the prospect’s commitment.  If the sales team leader struck out, then the sales manager would pick up the phone and once again extol the benefits of the loan to the prospect in the hopes of making the deal.  This is also a classic boiler room technique.

What if a prospect called into the boiler room atmosphere of a subprime lender, instead of being contacted by the lender?  So much the better, as far as subprime lenders were concerned.  But what if the prospect was calling in and referencing an offer supposedly made via a mailer received in their home, which specified a specific loan program, and also stated that they were “pre-approved” for the loan program, as presented in the mailer?  “Excellent,” the prospect would be told, “but first,” the account executive would say, “I need to verify some basic income and credit information in order to proceed with your loan.”

But what happened if the basic income and credit information revealed the prospect did not qualify for the loan program as specified in the “pre-approved” mailer the prospect received?  No problem, the subprime lender’s account executive would simply inform the prospect that the mailer the prospect received, which had been sent out by the thousands, was good only for only a short time after the mailer had been sent out, and that borrowers who met the criteria for that program had filled all available openings for the program.  But, based upon the income and credit information the prospect currently has on file with the lender, which of course will need to be re-verified, they may qualify for another loan program.  Would the prospect like to review the details?  Of course they would, because the prospect is in need of debt relief, cash, or both.

But is that not considered a classic “bait and switch” technique?” Not in the lending industry, where prior to being approved for a loan the prospect must first lay his cards on the table, so to speak, by allowing a full review of the prospect’s income and credit information.  But what about that mailer which had stated that the prospect had already been “pre-approved” for the loan?  The fine print buried at the bottom of the mailer covered just such a contingency, providing an “out” to the subprime lender with a disclaimer which stated that the loan was contingent upon credit approval, verification of income, underwriting approval, or language to that effect.

Just as in boiler room sales operations, the key to success in the subprime lending industry was to call, call, call.  It was a numbers game.  If an account executive was not on the telephone with a prospect, there was not going to be a sale.  If a prospect was asking too many questions, and the account executive was not able to follow the prescribed sales script, it was time to end the call and dial up a new prospect to make a fresh pitch.

Has a prospect declined to move ahead with an offered loan program?  Pass the prospect along to another account executive, or a sales team leader, or the sales manager, and let them take a whack at the prospect because they may just be able to sell the prospect on the pitched loan the account executive has been unable to move, and then get on the phone to the next prospect on the list.

As in most boiler room sales operations, the turnover rate of account executives within the subprime lending industry was quite high.  Though this caused some upper management concern, because new potential account executives were constantly being interviewed, replacing an empty desk with a fresh body to dial the phone was not difficult.  All that a new account executive really had to learn was the sales script, and once this was accomplished, they were on their way.

Posted by John Venlet on 04/01 at 10:04 AM
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