Elizabeth Karwowski of BEMG on Lead Generation
By MBA Insights Staff
September 3, 2018
Elizabeth Karwowski is CEO of BEMG, Ft. Lauderdale, Fla. BEMG, through its operating subsidiary Get Credit Healthy, uses a proprietary processes, platform and software to integrate with the lenders' loan origination software and customer relationship management software (to create new loan opportunities and recapture leads. For more information visit our website at www.getcredithealthy.com.
MBA INSIGHTS: Today's lenders are facing challenges that their predecessors of just 10 years ago did not. One often-discussed challenge is rising cost of lead acquisition. What are some ways that lenders can reduce lead acquisition costs while still producing results?
ELIZABETH KARWOWSKI, BEMG/GET CREDIT HEALTHY: That is a great question, and one of the crucial problems facing lenders today. Unless lenders figure out a better way to work with the hands they are dealt and find a better way to get the most out of their lead acquisition dollars, they will not be able to compete in the future.
In 2017, MBA announced that loan origination hit an all-time high at $8,887 per loan. Simply turning away would-be borrowers is no longer an option. A potential borrower's credit score can have a significant impact on the cost of lead acquisition. In the mortgage industry, a subpar credit score is one of the biggest hurdles to successful conversion of leads. All too often, leads that look great on paper in terms of employment status, income, and other assets, have a disqualifying credit profile or FICO score. In fact, more than one-third of all Americans have a FICO score of 620 or below. Unfortunately, this means that lenders could wind up shelling out serious cash for leads, only to discover that those consumers fall outside their products' guidelines.
Thousands of dollars' worth of leads and hundreds of millions of dollars' worth of potential business, fall by the wayside because of applicant credit scores. This problem has become so commonplace that many lenders have begun to partner with organizations that specialize in rehabilitating and recapturing those leads.
Those lenders have begun to solve this problem by referring otherwise qualified consumers to non-profits that specialize in credit remediation and rehabilitation. A select few third-party remediation companies provide these services at no cost to the lenders, which allows those lenders to get a proverbial second bite of the apple without expending any additional resources. Although the non-profits were established to benefit consumers, lenders have become an indirect beneficiary because they are able to maximize the return on their investment by recapturing those leads and converting them to millions of dollars in new loan closings.
INSIGHTS: What does the shift from a refi market to a purchase market mean for the ability of lenders to find new business?
KARWOWSKI: The challenge with the current shift to a purchase market is that it severely restricts lenders' ability to generate their own leads, making them much more reliant on outside sources that often prove to be pricey and unreliable. Whether you have to establish new relationships with realtors, force originators to go out and finding new prospects or having to purchase leads, the costs have gone up significantly, making margins very slim. The lending market is very competitive which draws consumers in getting the "best rate," again driving the margins to be slim.
Additionally, the "American Dream" of owning your own home, which was so highly coveted by generations past, does not resonate with millennials who simply do not view home ownership as a top priority. Where, in the past, the younger generations entering the workforce served as a great source of business, today many first-time homebuyers are significantly older and often have to overcome financial difficulties that prevented them from purchasing real estate earlier in life. So overall, I would say that if this trend continues, lenders are going to struggle to find the higher quality leads from which they're able to generate new business.
It is also important to note that in his purchase market where referrals from outside sources are a lender's bread and butter, it is imperative that a lender develops reputation for working with a borrower to ultimately become a home owner.
INSIGHTS: How is the overall consumer credit landscape affecting the ability to lend?
KARWOWSKI: The current FICO scoring models used by the GSEs (Freddie Mac and Fannie Mae) are more than 10 years old and conflict with contemporary methods of scoring seen in the newer models. Credit is one of the most important factors in qualifying a candidate. As I mentioned earlier, according to a study published by the Federal Reserve Bank of New York, more than one-third of Americans have a credit score below 620, which sounds bad enough. However, what's even more alarming is that the Consumer Financial Protection Bureau published a study that found in addition to those with poor credit, there are another 45 million adults who are either "unscoreable" or who do not have a credit score.
The recession also prompted many banks to re-evaluate their own general lending practices and qualification parameters, making it much more difficult for those consumers with less than stellar credit to obtain a mortgage. Implementation of those barriers was necessary in some cases. In many others, consumers who would otherwise qualify for a mortgage are denied every day, irrespective of their actual ability to pay back those loans, because credit scores are now weighed so heavily. In short, contemporary lenders face a much more burdensome task than their predecessors of just 10 years ago.
INSIGHTS: Your website describes a lot of "untapped" markets--many of them consumers with credit records that the industry used to call "subprime." Why do you see these markets as "tappable?"
KARWOWSKI: Did you know that if you miss even one installment payment, regardless of your perfect past performance, it could drop your credit score as much as 70 points? The concept of credit in this country is difficult to comprehend for most consumers in terms of how certain decisions will positively or negatively impact their credit. Paying bills on time does not automatically equal a good credit score.
From personal experience, there are many consumers who have high-paying jobs and could easily afford to make the mortgage payments on a desired home, but can't get a mortgage because they have low credit scores. One of the main issues faced by lenders and consumers alike, is that credit scores, alone, weigh so heavily on the decision-making process.
The solution is education, rehabilitation and credit remediation. The majority of people in this industry are aware that our credit system is far from perfect, and methods of calculating credit scores can often be counterintuitive. Little nuances such as paying off a delinquent account that has been dormant for a couple of years, can have an absolutely devastating effect in terms of credit score. It is perfectly rational to think that paying off a delinquent bill should raise the score. However, when that happens, the clock is essentially reset on that account and scores can dip anywhere between 50-100 points.
Credit, like finance or law, is a highly specialized area in which you can do more harm than good if you're not well versed or lack the experience needed to correct your credit profile in the proper way. More often than not, those consumers with less than optimal credit records are financially capable, and otherwise qualified, but lack the competent guidance necessary to raise their credit profile to a level that would more accurately reflect their financial health. Those are some of the reasons, based on my personal experience, why I think these markets are full of potential for lenders looking to build their book of business.
INSIGHTS: How do you see navigating these "untapped" markets in today's marketplace, given the lessons of the recent financial crisis, the reluctance of (most) lenders to avoid the underwriting mistakes of the past and the current regulatory environment?
KARWOWSKI: I don't think that I would characterize the problems in the financial crisis as underwriting mistakes as much as ill-conceived programs--but the net result has been a pendulum swing in the opposite direction. A QM or quality mortgage has to be so vanilla that there is no room for the more than 45 million consumers with little or no credit. I think it is incumbent upon lenders to provide options to all consumers that want to qualify but don't currently have the needed credit profile.
What that means is that every lender should be able to link their potential borrower with educational tools and/or resources that give consumers the necessary knowledge about the next steps they should take in order to qualify. As the industry standardizes many steps in the mortgage process, credit remediation solutions should be a standardized step at the beginning of the loan process. In my experience, this helps encourage many consumers to "NOT" see the buying process so painfully and discouraging.
As discussed before, there is a large group of consumers with less than optimal credit scores that have the income and the credit history to increase their scores fairly easily with the right guidance. These are the consumers with a good job, who realize the importance of rehabilitating their credit and who desire to make the responsible decision (to own a home) for themselves and their families. That being said, lenders do have an important role to play in the evaluation of each candidate; they should do their due diligence when considering each application to ensure that the applicants have the ability to pay their mortgage. However, lenders must also be weary of paralysis by analysis, meaning becoming so cautious and imposing such stringent guidelines that they begin declining qualified candidates. There is no blanket, one size fits all solution. Lenders just need to be smart and look at each applicant on a case by case basis.
INSIGHTS: In light of regulatory requirements, should lenders be performing credit rehabilitation in-house?
KARWOWSKI: In short, no. The Credit Repair Organizations Act, or CROA for short, is a federal law that falls under the broader Consumer Protection Act. It was enacted to address growing concerns about unfair and deceptive trade practices in the Credit Repair Service industry. Specifically, the purpose of CROA is twofold: 1) to ensure potential customers have sufficient information to evaluate whether to purchase credit repair services; and 2) to protect the public from false advertising and deceptive business practices.
Whenever I bring up CROA to lenders, they are usually unaware that some of their everyday business practices actually fall within the ambit of CROA, which could prove to be very damaging to their organization, if not corrected. For instance, a multitude of lenders often provide seemingly innocuous advice with the intent of helping potential clients when their FICO scores fall short of the qualifying range. However, in doing so, they're actually violating federal law and breaching contracts with vendors without even knowing it.
Any person or entity that provides any advice or assistance to any consumer with the goal of improving their credit falls within CROA's definition of a "credit repair organization." This means that if a lender provides any advice or assistance to a potential client in order to help that person improve his or her credit to qualify for its products, that lender would fall within the definition of a "credit repair organization," and be subject to all of the stringent regulations by which all credit repair organizations must abide.
Lenders' innate desire to help their existing customers and potential clients qualify for loans and other products may, unfortunately, lead them down a slippery slope that could potentially impute unwanted and unintended liability. Once a lender takes any action to land itself under the purview of CROA, it becomes subject to potential law suits from both, consumers and the CFPB.
Additionally, many of the largest providers of independent verification services in the financial services industry require lenders to certify that that they are not credit repair companies. Because these types of prohibitions are commonplace in contracts across the industry, if a lender does, in fact, provide the type of assistance or advice contemplated by CROA, it could very well lose the working relationships with credit reporting companies and its ability to pull credit, along with it.
INSIGHTS: Are there any steps that lenders should take, in-house, to rehabilitate the credit profiles of their leads and potential clients?
KARWOWSKI: In short, if I were a lender, I would be extremely cautious about providing guidance about rehabilitating credit scores to potential clients for the reasons that I just mentioned. There are many third party companies with which lenders could partner in order to help their leads and potential clients qualify for their products. Utilization of those third parties provides a layer of insulation for the lender which could help avoid potentially running afoul of federal law or breaching vendor contracts.
I also think that it would be a waste for lenders to devote their time and resources to helping unqualified candidates raise their credit scores. In order to properly help their prospective clients, lenders would have to either hire experts in the credit remediation field who would be capable of providing that assistance, or train their current employees so that they could competently perform that task. On top of that, there is no guarantee that the consumers to whom the lenders provide that assistance will ever reach their goal of becoming qualified.
As we discussed, the cost of lead acquisition is already weighing heavily on many lenders' bottom lines, so it makes no sense to inflate those costs even more by trying to perform the credit remediation in-house. There are other companies that specialize in that field and that perform these services at no cost to the lenders. For me it's a no-brainer. The only thing I would find useful to lenders to do is provide resources so that consumers can properly educate themselves on next steps they can track.
INSIGHTS: The credit remediation industry has had a questionable history and some high-profile companies with less-than-stellar reputations. Before partnering with a credit remediation company, what should a lender look for?
KARWOWSKI: Credit repair companies are generally viewed in a negative light because of a few bad actors in the industry. Public perception is easily skewed when most publications and news outlets only report about companies defrauding their clients or cases in which the CFPB is prosecuting claims of statutory violations. In fact, this view is so prevalent, that, as I mentioned before, credit reporting agencies have even incorporated prohibitions on working with credit repair companies into their contracts with lenders.
It is extremely important for lenders to ensure that they only partner with ethical companies that are actually capable of helping consumers, and that conduct business within the confines of the law and regulations that govern the industry. When choosing a partner, it is imperative that lenders are able to identify and choose a reputable, full service company that not only provides credit remediation services, but also provides consumers with a wealth of resources such as coaching and education. As mentioned before, Partners should focus on educating consumers so that they are able to understand ramifications of their financial decisions in order to ensure responsible borrowing in the future. That methodology will help consumers and lenders, alike.
Lenders should also ensure that there are mechanisms in place to monitor the progress of all consumers that they refer to credit remediation partners. This will operate to ensure that not only are the referrals making progress, but that the lenders are advised upon the completion of the rehabilitation process so that they can recapture leads in which they've invested considerable time and resources.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)