Monday, March 31, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 5 - The Pitch

The emotionally charged bombardment of easy dollars advertising campaigns utilized by the subprime lending industry did bring potential borrowers in the doors, or more accurately, caused subprime lenders’ phones to ring.  But, the emotions which ignited the ringing of the phones alone was not sufficient to seal a deal.  Subprime lenders needed an easy to hit, homerun pitch to win subprime borrowers’ confidence, and secure their signatures.

The subprime lending industry was exceptionally adept at making the refinance pitch to borrowers with credit problems.  Whether the borrower was hearing the pitch for the first time, the third time, or the fifth time, subprime lenders knew exactly what borrower buttons to push to induce borrowers to refinance, even if the benefits to the borrower of refinancing were few and lackluster.

All individuals, whether purchasing a car, a refrigerator, or, in our case, a mortgage, are susceptible to emotional cues, and the emotional cues, or buttons, for borrowers who only qualify for subprime financing are many.  Subprime lenders knew this, and they regularly plied these emotional buttons with virtuosity.

The majority of subprime lenders provided a sales script, what many of us would think of as a playbook, to their account executives.  These sales scripts, which have been psychologically refined for optimization of profitability, provided the subprime lender’s account executives with the exact sequencing of emotional buttons to push at specific points in their conversations with potential subprime borrowers.  In fact, the sales script were so well fine tuned that a subprime lender could take a reasonably intelligent and personable individual, with no mortgage experience what-so-ever, off of the street and have them signing up borrowers for subprime loans in five (5) weeks or less.  Which was quite important as the turnover rate of account executives within the subprime loan industry was quite high.

The primary emotional button for buyers; though as buyers we may not want to admit it; of any product or service, is enthusiasm.  This was especially true in subprime lending, and here is why.  Most individuals, who are experiencing credit problems which affect their ability to borrow, are embarrassed by this issue and are not necessarily willing to speak about the problem, whether to their family, their friends, or the unknown subprime lending account executive at the other end of a telephone line.

The most successful subprime lending account executives were those who took the provided sales script, memorized it frontward and backwards, and then enthusiastically delivered the scripted lines to the potential borrower beginning with the word hello.  The initial enthusiastic greeting and emotional cues, scripted by subprime lenders, and delivered word for word by the lender’s account executives, were designed to suck borrowers deeper into the sales script where the homerun pitch could be made.

After the initial greeting and introductions had been made, the sales scripts were designed for seamless gliding into the actual sales pitch.  One of the most effective initial sales pitches in the subprime lending industry ran along these lines, “Mr. Borrower, or may I call you Joe?  Okay Joe, we’ve just completed a review of your recent mortgage payment history, and based on your history it looks like we could very well put together a new mortgage for you and save you a bit of money every month, and put some cash in your pocket.  Do you have a few minutes to talk with me about this opportunity?”

Sounds promising, does it not?  Of course it does, and who wouldn’t have a few minutes to talk about a potential “opportunity” to save some money and obtain some cash at the same time?  The vast majority of subprime borrowers who heard the above words, especially the words “cash in your pocket,” delivered enthusiastically of course, breathlessly waited for the next line of the sales pitch.  Of course the borrowers may have been well aware that they had not been paying their mortgage payment, or other credit obligations, in a timely manner and had little chance to actually improve their current financial situation.  But why would a subprime lender contact them, state that they could save them some money, and possibly put some cash in their pocket, if what the subprime lender said was not true?  For one reason, and one reason only.  To profit from the borrowers’ beleaguered situation.

Another favored, and effective, sales pitch of the subprime lending industry was, “Mr. Borrower, your current mortgage loan is due to have an interest rate increase, and now would be a good time to beat that potential increase by refinancing while rates are still low.” Whose ears would not perk up and pay attention if they were under the gun of a potential interest rate increase?

Less effective, but just as compelling to subprime borrowers, was the sales pitch of, “Mr. Borrower, I’ve recently refinanced quite a few people in your area,” (whether true or not) “and with interest rates about to increase,” (whether true or not) “now would be a good time to review your current mortgage to take advantage of existing rates, and possibly put some cash in your pocket.”

Of course not every sales call made necessarily followed the sales script.  The borrower may ask what interest rate is available right after the initial greeting.  Or, the borrower may offer up some other objection to continuing the call.  This did happen, and quite frequently, but the subprime lending sales script provided the answer to interest rate question, and every other offered objection to the call, in order to keep the prospect on the line and the account executive in charge of the pitch.

For example, if a borrower interrupted the sales pitch with a question in regards to the interest rate charged, a typical scripted reply was, “Mr. Borrower, we have many interest rates to choose from, but the only way I can quote you an interest rate is by completely reviewing your credit and income information, which, by the way, is free of charge.  Are you interested in reviewing this information with me so that we can provide you with the best possible interest rate?”

Another effective and emotional sales pitch utilized in subprime lending preyed on subprime borrowers’ constant dealings with disgruntled creditors requesting payments owed.  Where these creditors may have been brusque with the borrowers, the subprime lender was soothing and full of optimism.  The subprime lender may have promised immediate relief from the constant creditor calls by consolidating all of the borrowers’ current outstanding debt into one, low, monthly payment.  Or, the lender may have informed the borrower that their connections to the credit monitoring agencies may assist the borrower in having negatively reporting credit lines cleaned up, which, in turn, may allow the borrower to qualify for a better interest rate.  Needless to say, both of the above mentioned offers, made by subprime lenders, offered an emotional, and actual, relief which subprime borrowers were quick to grasp.

What happens, though, after the sales pitch has been made to the borrower, and the loan terms offered to the borrower did not induce the borrower to proceed with the loan?  Did the subprime lender simply chalk it up to the vagaries of doing business and move on to the next potential borrower?  Not likely.  In many instances subprime lenders practiced a technique which is known in the industry as “second voicing.”

Second voicing was the practice of handing off an unsuccessfully sales pitched borrower to a more seasoned subprime lending account executive, or preferably the sales manager, within the same subprime lending branch.  What typically happened in a second voicing was the borrower was contacted once again, ostensibly as a simple courtesy call to check up on the performance of the account executive who originally made the sales pitch.  The second voicing individual usually said something along the lines of “Mr. Borrower, my name is Joe the manager, and I wanted to touch base with you today to evaluate Mike the account executive’s performance and ensure that Mike the account executive adequately answered all of your questions and addressed all of your lending needs.  I also want to ensure the Mike the account executive recommended the correct lending program for your financial needs.  Do you have a few minutes to talk with me about that?”

This second voicing approach, once again, appealed emotionally to subprime borrowers.  It provided borrowers with another opportunity to talk, to provide input, and possibly voice objections, which the second voicing individual would politely listen to and take notes on.  More importantly, it provided the subprime lender, under the guise of performance monitoring, via the individual performing the second voicing, an opportunity to pitch the subprime loan to the borrower once again.

Though second voicing may have only converted one (1) out of ten (10) potential borrowers who had refused the initial subprime loan pitch, that ten percent (10%) second voicing conversion rate brought in thousands of dollars in profit to the subprime lenders’ bottom lines.

But the pitch which produced the most homeruns in subprime lending was the monthly payment, cash in your pocket pitch.  If a borrower had allowed the account executive to gather all their pertinent financial and credit information, the account executive would take that data and massage the borrower’s current credit obligation numbers in an attempt to ascertain how to most effectively present a monthly payment to the borrower which was less than what the borrower was currently paying per month.

In most instances, if a monthly payment number could be presented to the borrower which saved them fifty dollars ($50.00) or more per month, as compared to what they were actually currently paying per month for all their monthly debts, and put cash in their pocket, like a trophy for a job well done, another subprime loan deal was inked.

Posted by John Venlet on 03/31 at 05:48 AM
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