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Be A Hero, Outmaneuver, Outperform, Outlast

One of the most common concerns weighing on loan officers across the country is the rising cost of lead acquisition in the face of a steady decline in mortgage applications. An increase in home prices across the market is taking its toll on the number of consumers actively applying for a mortgage. According to reports released by the Mortgage Bankers Association, mortgage applications have fallen a staggering 17 percent from only a year ago, and experts surmise that the rising purchase prices are playing a major role. To compound the problem, refinancing applications have also continued to trend downward, and are the lowest they’ve been since the end of 2000. When you combine these statistics with the ever-increasing cost of origination, it paints a bleak picture for lenders and loan officers. 


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The question has now become, “how can lenders weather these arduous trends to outmaneuver, outperform, and outlast the competition?” Because the number of applications is down, overall, one of the best available solutions is forming of strategic partnerships that will allow lenders to wring all possible value out of those leads that are available by increasing the rate and percentage of conversion. I know this sounds much easier said than done, but if lenders are able to step back to gain some perspective regarding why their leads are failing to transition into successful applications, the problem becomes much easier to solve. 


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Subpar credit scores are one of the leading hindrances to being approved for a mortgage. According to a 2016 study published by the Federal Reserve Bank of New York, more than one-third of Americans have a credit score below 620. Even more alarming, the CFPB published a study in 2015 that found in addition to those with poor credit, there are another 45 million adults who are either un-scoreable or who do not have a credit score. Because the number of applications is down, in general, its is now more important than ever to find creative ways to overcome a low credit score for those applicants who would otherwise qualify for a loan.


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We are beginning to see the emergence of non-profits that specialize in credit remediation and rehabilitation. Those third-party rehabilitation companies provide services to consumers at no cost to the lenders. This allows those lenders to steer their potential clients toward the assistance that they need to qualify without expending any additional resources, rather than the alternative of simply rejecting potential business. Those lenders who are able to stretch their dollar the furthest by making the most of the leads that they do receive, are the ones who will enjoy the most success in this market and live to see the day when it starts trending in a more favorable direction.

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Generate Revenue While Serving The Underserved


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We, as a country, have made huge strides since the civil rights movement of the 1960’s. The U.S. luckily came to the realization that all of its citizens, regardless of race, must have the opportunity to succeed in every facet of life if our country was to succeed as a whole. The disparity in minority homeownership and access to capital for that purpose came to the forefront of the national discussion, which prompted Congress to pass the Fair Housing Act as part of the broader Civil Right Act in 1968. Despite this crucial piece of legislation, it was discovered that banks were engaging in a practice called redlining, which essentially identified low to moderate income neighborhoods and refused to make loans to any residents of the residents therein. This obviously had a disparate impact on minorities who made up the majority of residents in these low to moderate income areas. To combat this practice, the Community Reinvestment Act was signed into law in 1977 which required banks to ensure that all communities that they served were afforded equal access to capital. 


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Despite these regulations, the debate about access to housing for minorities, and the home ownership divide still rages today. Unfortunately, a very large gap still exists between white and minority homeownership despite the concerted effort to remedy the issue. The Urban Institute presented data analyzed by the American Community Survey from the 100 cities with the largest number of black households. Its analysis found that Minneapolis, Minnesota had the largest disparity where the white homeownership rate was 74.8 percent compared to a black homeownership rate of just 24.8 percent; a 50 percent gap. The smallest disparity was observed in Killeen, Texas where the rates of white and black homeownership were 63 percent and 48.5 percent, respectively; a 14.5 percent gap. According to the US Census Bureau, the overall homeownership rate for black households across the country has reached a 50 year low of 41.7 percent. Our country has not seen homeownership rates this low in black communities since before the enactment of the Fair Housing Act, when it was still legal to discriminate on the basis of race. 


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Hispanic homeownership rates, although slightly higher, still pale in comparison to the national average. According to the US Census Bureau, the Hispanic homeownership rate was at 46.2 percent as of 2017, 17.7 percentage points lower than the overall national average of 63.9 percent. Freddy Mac released a report entitled “Will the Hispanic Homeownership Gap Persist” in which it estimates that Hispanics will close the gap with white homeownership rates by 5.1 percentage points by 2035. However, it bases this projection on past immigration patterns which, in this day and age, are far from certain to repeat themselves. 

Many experts believe that the housing bubble and subsequent 2008 recession is the number one contributing factor to the current gap in homeownership. Although the recession impacted all Americans negatively, regardless of demographic, it had a disproportionate impact on minorities who purchased homes at much higher rates during the height of the market. Furthermore, many minority borrowers were steered toward subprime loans despite the availability of other financing options, which resulted in several banks settling for millions of dollars with the Justice Department. 

Although the effects of the recession still affect the vast majority of Americans, they are amplified within minority groups in terms of the lingering damage to their credit. The credit profiles for the majority of those individuals who were able to obtain a mortgage just prior the recession have been scarred by foreclosures and, in many instances, crippling credit card debt incurred in the aftermath to cover necessities. Because these factors can affect credit scores for years, without assistance, the future looks bleak for many of these past borrowers.

Minority credit issues, however, aren’t just limited to those individuals who were directly affected by the housing crisis. The Urban Institute reported that in 2013 only 41 percent of Hispanics and 33 percent of black Americans had credit scores over 720 compared to 64 percent of white borrowers. Minority groups, specifically those who are black or Hispanic, are often plagued by lower credit scores because of the methods by which various scoring models generate credit scores. The CFPB found that minority populations are more likely to be credit invisible because they are less likely to have traditional sources of credit such as loans and credit cards. One solution proposed by Experian in a 2015 white paper entitled “Let there Be Light”, was to incorporate utility bill payments into the credit analysis. The white paper estimated that the inclusion of this data could reduce the number of subprime borrowers by as much as 47 percent. Until alternative metrics are devised to take these extenuating circumstances into account, however, leaders in the housing industry must work to find solutions to bridge the homeownership gap.

Many financial institutions are required by law to provide loans and extend credit to those individuals in low to moderate income communities, but they must do so in a manner consistent with safe and sound operation. Although the spirit of the law is meant to help those populations that are traditionally underserved,  many have argued that it is becoming increasingly difficult to lend in those areas because of the numerous factors discussed above. Many low to moderate income individuals, specifically minorities, do not have the necessary credit profile to qualify for the loans for which they apply. This often puts financial institutions in a bind. Although they are ready and willing to lend to qualified borrowers in those communities, precautions must be taken to safeguard the operation of their business. 

Fortunately for banks and other lenders, there may be a way to not only assist those minority groups and lower income individuals who need it the most, but generate significant revenue by tapping into a market that would have otherwise been inaccessible. The solution is to partner with not for profit companies that provide consumers with credit remediation services in addition to other resources such as coaching and education. When choosing a partner, banks and lenders should ensure that their potential borrowers have access to educational resources which will enable them to understand ramifications of their financial decisions. Doing so will ensure responsible borrowing in the future, which will help consumers and lenders, alike.

It is also imperative that any potential partner have mechanisms in place to track, monitor, and measure progress and results. Doing so will ensure the generation of data that can be studied to evaluate efficiency and the impact on those minority and low to moderate income communities. Those metrics can then be utilized by governmental and regulatory bodies to decide how best to solve the problems faced by those communities going forward. 

If key players in this sector are able to adopt and implement programs to help bridge the housing gap and raise the rates of minority homeownership, the industry as a whole will reap the benefits of a more robust market. There are an estimated 43 million black Americans in the U.S. and Hispanics, who are the fastest growing demographic, make up 18 percent of the population. These two groups represent billions of dollars in potential new loan opportunity. The only logical solution is to get these groups the assistance that they need in order to help eliminate any disparity while simultaneously to strengthening the housing market and our economy as a whole. 

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Keeping Turned Down Borrowers In Your Pipeline

The difficulty of establishing and maintaining a reliable pipeline of new business has become readily apparent across the mortgage industry. Low credit scores, subpar credit profiles, and rising cost of lead generation and acquisition have taken their toll on the price per lead and, consequently, the total cost of origination. Furthermore, the shift from a refinance to a purchase market has only made it more difficult to drum up new business, adding to the frustration experienced by many loan officers in this sector.

In years past, loan officers relied heavily upon in-house generation of leads. Those leads were typically of higher overall quality, and the prior business relationships removed many of the barriers to conversion common to novel sources of business. However, as many in the mortgage industry are now being forced to look outside of their own organizations for new sources of business, they are often stymied by the sheer number of consumers who simply do not qualify for financial products because of their credit profiles.

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According to a report published by the Federal Reserve Bank of New York, more than one-third of all Americans have a FICO score of 620 or below. Furthermore, the Consumer Financial Protection Bureau revealed that over 45 million adults either do not have a credit score or are un-scorable. There are 300 million people in the United States (that number includes children), and 15 percent of them do not have a credit score. All too often, banks simply tell those people who fall outside qualifying parameters that they do not have the necessary credit, and implore them to come back if and when their circumstances change. There are no mechanisms in place to assist these potential clients, and the time and resources spent acquiring and attempting to convert those leads is seemingly wasted.

The question that every lender and loan officer should be asking themselves is: “Is there any way to salvage even a fraction of those rejections by turning them into qualified applicants?” The answer is yes, and the best way to go about doing so is to form strategic partnerships with entities that specialize in credit remediation and rehabilitation. By forming those partnerships, lenders are able to tap into a previously inaccessible market, while broadening the spectrum of customer services that they offer to current and prospective clients and remaining compliant with various federal regulations.

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Some lenders have recognized the need to steer unqualified applicants toward resources that could help them improve their credit, but have reservations about forming these partnerships with third parties. One of the main reasons that loan officers are reluctant to refer a lead to a third party is because they fear relinquishing control over a lead in which they’ve already invested considerable resources. This is why it is imperative to partner only with those organizations that offer a completely transparent rehabilitation process, and which allows the referring lender to maintain its control at every stage of the remediation process.

Ideally, the loan officer should receive assurances from its referral partners that the lead will not sold or referred to any entity other than that which referred the lead. Additionally, lenders should insist upon periodic progress updates when the referral reaches certain milestones. This type of system will allow the lender to decide how interactive it should be throughout the remediation process. Smaller lenders with limited resources may wish to simply monitor progress, while those larger lenders with greater availability of human capital may wish to be very “hands-on” in order to build a stronger rapport with their referrals. Regardless of which tactic lenders decide is best for them, it is imperative that every referring lender receives notification immediately upon the referrals’ completion of the remediation program, so that those lenders can re-capture those leads when they become qualified for the loans for which they initially applied.

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Many lenders are also beginning to toy with the idea providing remediation services, themselves, in an attempt to assuage their own fears associated with referring leads to third party partners. However, many do not realize that if they were to offer these types of services, or even provide advice regarding self-help, they could be reclassified as a “Credit Repair Organization” under federal law. If this were to happen, it could impute unwanted liability. A financial institution that gets reclassified could face fines or other penalties for failing to comply with stringent regulations imposed upon organizations or individuals who provide those types of services or advice. Forming partnerships with reputable companies that routinely provide this type of assistance would ensure that lenders are able to protect and insulate themselves, while still providing a service that many applicants need.

Aside from converting those leads that would have otherwise been unqualified into viable sources of business, strategic partnerships with third party credit remediation companies offer numerous benefits to lenders that are not as obvious. Lenders should be able to outsource the entire credit remediation process without devoting any additional resources, whether pecuniary or otherwise, to those leads that were initially unqualified. Upstanding companies should never charge lenders a fee for their services. When lenders are able to recapture unqualified leads it decreases both, the cost per lead and the average cost of origination, which are two common goals that every lender strives to meet.

Some of the more seasoned lenders may have reservations about working with credit remediation companies or making overarching changes to their business practices and policies. This is understandable, considering that they have enjoyed past success operating as they always have. However, as the industry landscape changes, lenders must adapt in order to maximize the increasingly limited opportunities that present themselves. A strong pipeline to a previously underserved, untapped market will certainly benefit those who have the foresight to access it early to take advantage of the new source of business. Strategic partnerships such as those described herein are one of the best ways to do just that, and will yield a net benefit to lenders, as they do not require the expenditure of precious resources that would be better spent on in other areas of business development. As the marketplace becomes ever more crowded, and the cost of origination continuously narrows profit margins, the adage “adapt or die” has never resonated so clearly.

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Creating Borrowers For Life

Ever since the housing market took a hit back in 2008, the industry has been struggling to bounce back. The imposition of stringent federal regulation, coupled with shifting priorities for younger demographics that have, historically, held home ownership in high regard have taken their toll on lenders’ bottom lines. Lead generation is getting more expensive by the day, while the overall quality of those leads is slowly deteriorating.

The most frustrating aspect of the mortgage landscape, however, is that those leads that could potentially be converted into new business are falling by the wayside because of sub-par credit scores. To those in the lending industry, it’s common knowledge that poor credit is one of the most common hurdles consumers face when it comes to homeownership. The Federal Reserve Bank of New York conducted a study in which it concluded that over one-third of all Americans have a FICO score below 620. One third; that translates into over 90 million people (only takes those over the age of 18 into account). To compound that statistic, the Consumer Financial Protection Bureau estimates that there are another 45 million people who do not even have a credit score. There is little doubt that lenders in today’s market are fighting an uphill battle.

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Loan officers across the country are forced to turn thousands of potential clients away every single day because their credit scores fall just short of the qualifying threshold. When an applicant’s credit score is ten, twenty, or thirty points short of the score required for eligibility, many lenders are tempted to intervene and advise those would-be clients to take remedial steps to raise their scores. The advice could be something as simple as paying off a credit card to lower their debt to credit ratio, or disputing a delinquent account that the prospective client maintains was reported incorrectly. These minor steps might be just enough raise the applicant’s credit score, qualify them for a mortgage on their dream house, and earn the lender a life-long client. However, few lenders realize that providing this type of advice to consumers, no matter how well intentioned, could subject the loan officer and the organization for which he or she works to serious liability from both, the federal government and the consumers to which the assistance was provided.

The Credit Repair Organizations Act (“CROA” or the “Act”) is a federal law, which falls under the broader Consumer Protection Act. Under CROA, any person or entity that provides any advice or assistance to any person with the goal of improving their credit in exchange for valuable consideration (i.e. the sale of financial products) can be classified as “credit repair organization” under the law, even if they’re not being directly compensated for providing that advice. A reclassification of this nature could have a devastating impact on any organization that engages in the practice of providing this or similar assistance. Once a company is classified as a “credit repair organization”, it becomes subject to all of the stringent requirements imposed by the other provisions of the statute, which, if credit repair were not the main focus of that lender’s organization, would almost certainly mean that the lender is conducting its business in violation of the law. The Consumer Financial Protection Bureau has begun to take an interest CROA cases, and has already reached seven-figure settlements with several companies that have run afoul of the statutory provisions.

In addition to potentially being subject to governmental backlash, many lending organizations that provide this type of assistance to their potential clients also risk being stripped of their ability to pull credit. Surprisingly, few people in the industry are aware that many of the largest providers of independent verification services require lenders to certify that they do not engage in credit repair. These prohibitions are often glossed over because many lenders do not realize that the advice they provide actually puts them in breach of these agreements. If these verification services discover that the lenders with which they contract are engaging in these practices in-house, they could very well, and most likely will, terminate the contracts and refuse to provide their services in the future.

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Because of the ever-increasing competition in the mortgage industry, it is imperative for lenders who wish to succeed to undertake initiatives to ensure that they stand head and shoulders above their competition. For the last few years we have seen a shift from a refinance to a purchase market. Additionally, the average origination costs have been steadily increasing, while the quality of leads is on the decline due, in part, to the credit difficulties widely experienced by consumers. Taking all of these factors into account, the question then becomes, “how?” “How can I differentiate myself from my competitors? “How can I increase my conversion rates?” “How can I establish a rapport with my clients to ensure repeat business and brand loyalty?”

One solution is to form strategic partnerships with third party companies that are able fill in gaps by providing services that you cannot. As discussed above, there are thousands of consumers who get turned away every day because of their credit scores. These consumers look great on paper in terms of employment status, income, and other assets, but their FICO scores render them ineligible for loans. Although lenders cannot and should not attempt to rehabilitate these consumers in-house, they should not just turn them away either. Those unqualified or underqualified consumers represent hundreds of millions of dollars in potential market share and, if lenders are able to implement a system to capture even a fraction of those consumers, they could bolster their bottom line by serving what was previously viewed as an untapped market, while establishing customer loyalty by indirectly aiding those customers that have traditionally been brushed off by the competition.

There are several not for profit entities that specialize in credit remediation and rehabilitation no cost to lenders, whatsoever. Although the non-profits were established to benefit consumers, lenders who choose to partner with these companies stand to become ancillary beneficiaries, while providing a niche service to their prospective clients. The effects of implementing this strategy are threefold in that lenders: 1) are able to insulate themselves from the potential liability that accompanies being reclassified as a credit repair organization, while ensuring that these consumers receive the assistance they require; 2) are able to maximize the value of every lead thy receive by providing this service without expending additional time or resources on conversion; and 3) are able to establish brand loyalty by offering a crucial service that competitors do not provide while simultaneously tapping a pipeline of new business.

When evaluating potential partnerships, it is imperative that lenders are able to pinpoint those organizations that are not only reputable, but that employ experienced personnel who are capable of providing the services necessary to rehabilitate the referred consumers. Not only should a chosen not for profit provide credit remediation, it should also provide coaching and education to give consumers who have traditionally experienced credit difficulties the requisite knowledge base to make sound financial decisions in the future. By affording consumers resources that teach responsible borrowing and spending habits, lenders can help ensure that when these clients return to them, ready to refinance or purchase another home in the future, they have the necessary credit profile to allow for an expeditious closing.

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Lenders should also ensure that there are mechanisms in place to monitor the progress of all consumers that they refer to their not for profit 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. The lender should also endeavor to periodically follow up with their referrals during the remediation process in order to build stronger relationships, which should lead to higher conversion rates upon completion.

Although it is getting increasingly difficult to close new loans in the mortgage industry, there are plenty of potential sources of business for savvy lenders that know how to recognize them and have systems and strategies in place to capitalize. By differentiating your organization and providing consumers with alternatives to rejection, you have the ability to maximize lead value and cut origination costs, while simultaneously building lifelong client relationships.

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Frustrated With Loan Fallout? Don’t Reject…Redirect.

Quality leads. In the wake of the federal regulations imposed after the 2008 recession, consistent access to quality leads is often regarded as the “X factor” that will make or break a loan officer’s career. Unfortunately, they usually prove to be as costly as they are difficult to come by, and no one method of lead generation has definitively outperformed the rest. Two of the most common lead generation techniques are the purchase of leads from companies that specialize in lead aggregation and direct marketing on search engines such as Google or Bing.

There are many lead generation companies that claim to be more cost effective than others or provide batches of leads at prices that often sound too good to be true. However, more often than not, those cheaper leads are priced so “competitively” because they have already been contacted ad nauseum and are simply not viable sources of potential business. Like most other things in life— you get what you pay for.

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It should also go without saying that a loan officer can’t successfully build his book of business simply by purchasing the most expensive leads available. For instance, a lender might have more success if it markets directly to consumers who are actively seeking out the products being offered by that lender. Depending on the target audience and the nature of the product, lead generation via direct marketing might prove to be more cost-effective and produce better results.

Before investing considerable resources into the various lead generation mechanisms, veteran loan officers apprise themselves of the available generation options and methodologies, their respective costs, and establish procedures and/or partnerships to maximize their return on investment.

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Purchase Leads from Third Parties

One of the more prevalent avenues through which many loan officers and mortgage companies cultivate leads is via third parties that specialize in lead aggregation. These companies have online databases which contain consumer information which may include income, age, current home value, and desired loan amount. Then, depending on the third-party website, lenders have the ability to filter potential customers based upon that information and target only those consumers that meet the lenders’ criteria.

It is common knowledge amongst those who purchase leads from third party lead aggregators that quality is often reflected in the price per lead, and the price per lead can fluctuate widely. The question is, then: What factors influence the quality of any particular lead? First and foremost, the exclusivity of the lead will often be used as the prime indicator of its quality. Exclusivity refers to how recently, and the frequency with which, the lead has been contacted by other lenders. While there is no exact metric for the duration of time elapsed since the last time a lead was contacted, a lead that is sold as exclusive should not have been contacted by another lender for several months and, in some cases, has never been contacted. These leads often provide the best opportunity for a lender to close, which makes them more valuable and, in turn, more expensive than non-exclusive leads.

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Non-exclusive leads, as the name suggests, normally mean that the consumer information has been disseminated to several other lenders who are all vying for that consumer’s business. A lower average closing percentage is reflected in the lower price per lead. Normally the more lenders that receive the lead, the cheaper that lead is.

There are several other characteristics that should also be taken into account when assessing the quality lead. For example, the depth of a lead, or the number of datapoints attributed to each consumer, determine how comprehensive a view the lender will have of prospective clients. The greater the depth, the more informed a decision the lender will be able to make when establishing its marketing strategy. Accuracy of the data is another factor that should be considered by a prospective buyer. The name of a consumer, coupled with incorrect or out of date contact information, is obviously nowhere near as valuable to the lender as those leads for which that information has been verified.

All of the aforementioned characteristics factor into the price of any particular lead or batch of leads. Depending on the source, the actual dollar amount of two seemingly identical leads can vary. One of the highest, if not the highest price per lead was reported by hubspot.com in 2017. Hubspot reported that the average cost per lead in the financial services industry was $272.00. However, this figure has been rebuked by many industry professionals as extremely high and most likely inflated. More conservative estimates place the cost for leads of the highest quality (exclusive, with a plethora of data points, and verified information) anywhere between $70.00 to just over $100.00 per. The price for leads that are semi-exclusive, lack as much depth, and/or lack any of the other important characteristics of the highest quality leads usually decreases proportionately to their information disparity.

Search Engine Marketing

Search engine marketing (SEM) is another method by which many cyber savvy lenders have begun to generate leads. The basic premise of SEM is to advertise directly to those consumers who are searching on Google, Bing, or any other popular search engine, for precisely the products being offered by the lender. For instance, if a lender is looking to target consumers who are in the market for a new home or looking to refinance their current home, that lender can utilize AdWords on Google or BingAds on Bing to ensure that their website and ad copy is displayed at the top of the search results when those consumers’ search terms contain certain keywords chosen by that lender such as “mortgage” or “refinance”. This method of marketing allows the lenders to track certain metrics, such as how many people are clicking on their advertisements and cross-reference the number of clicks with the actual number of applications they receive.

Search engine marketing is a popular tool for those companies who wish to generate fresh leads in-house using their own customized criteria, and who have the human bandwidth to measure and track results. This method, however, can prove to be a double-edged sword. Although the advertiser is only responsible for paying fees in the event that a potential lead clicks their link, if the search parameters are too broad, or the potential lead is looking for something unrelated (such as a college student writing an economics paper about refinancing), all of those excess clicks could prove to be very costly without yielding desired results. A lender using AdWords can expect to pay upwards of $124.00 per lead, which is on the high end of the lead generation spectrum when compared to leads purchased from third party aggregators. In this instance, however, lenders have the opportunity to cut out the middle man and market to consumers, directly. If done right, the lender can target specific consumers with pinpoint accuracy, eliminating wasteful spending. But if done incorrectly, it could prove to be a costly exercise in futility.

Maximize Lead Value

The aforementioned methodologies are meant to serve as two examples of how many lenders choose to generate quality leads and connect with promising prospects. Both have the potential to generate new loan opportunity but, if not properly researched and executed, both have the potential to devolve into expensive albatrosses around the necks of loan officers. Regardless of the outcome, lead generation, although necessary, can, and often will, prove to be a costly endeavor. For this reason, it is imperative to implement strategies to ensure that lenders will wring out all the value they can from the leads they purchase.

In the mortgage industry, a subpar credit score is one of the biggest hurdles to successful conversion of leads. All too often, leads who look great on paper in terms of employment status, income, and other assets, have a disqualifying 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 that would otherwise be considered the highest quality, only to discover that those consumers fall outside their products’ parameters.

Because this problem has become so commonplace, many lenders have begun to partner with organizations that specialize in rehabilitating and recapturing those leads. Why let thousands of dollars’ worth leads, and millions of dollars’ worth of potential business, fall by the wayside because of credit scores? Well, now you don’t have to. Lenders have begun to solve this problem by referring those otherwise qualified consumers to non-profits that specialize in credit remediation and rehabilitation. Although the non-profits were established to benefit consumers, lenders have become an indirect beneficiary. Now they are able to recapture those leads in which they’ve invested so heavily, thus maximizing the return on their investments in the form of millions of dollars in new loan closings.

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Be A Hero, Recapture Your Potential Borrower Leads

It goes without saying that lenders in today’s housing market face a much more burdensome task than their predecessors of just ten years ago. The financial crisis of 2008 forever changed the face of the American economy. The federal government enacted stringent regulations, which were designed to protect and prevent consumers without sufficient means from assuming “overly-burdensome” financial obligations. The recession also prompted many lenders and 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. Implementing 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.

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The aforementioned regulations promulgated by regulatory agencies and banks, alike, have made it much more difficult for loan officers to convert their leads into actual mortgages. Rising interest rates have also exacerbated the conversion difficulties by shifting trends from refinancing to much more of a purchase market. Finding a first-time homebuyer, who actually has the necessary credit score to qualify for a mortgage, is becoming more difficult by the day. According to a 2016 study published by the Federal Reserve Bank of New York, more than one-third of Americans have a credit score below 620. Even more alarming is the CFPB’s 2015 study that found in addition to those with poor credit, there are another 45 million adults who are either un-scoreable or who do not even have a credit score.

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The statistics seem to paint a bleak picture for loan officers and lenders, alike. Today, younger groups (such as millennials) who have the necessary credit do not prioritize home ownership, and those who do desire to purchase do not qualify. What if, however, there was a way to convert those unqualified applicants into viable candidates? What if there was a way to tap into a market that was previously inaccessible? Well, the good news is that there is a way. Not-for-profit companies have taken notice of the credit problems facing would-be home owners, and have gone to great lengths to work with those unqualified applicants to rebuild their credit while providing financial education.

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Loan officers across the country have begun to utilize non-profits by referring their unqualified leads for coaching and education. After the applicant completes the necessary courses and programs, lenders are often able to recapture those leads who now qualify for the financial product for which they initially applied. Although the not-for-profits were established for the purposes of helping those seeking to turn their dreams of home ownership into reality, lenders have become an indirect beneficiary of their services via an ever-increasing qualified applicant pool.

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Lenders: Are You Unwittingly Violating The Consumer Credit Protection Act?

The Consumer Credit Protection Act. No doubt you’ve heard of it but, unless you’re a consumer protection lawyer or a masochist, you’ve probably never sat down and read it. Sure, everyone knows that law prevents “evil corporations” from taking advantage of consumers, but did you know that it also might penalize you or your company for trying to help your potential clients?

That’s right; you can be sued by the CFPB for providing assistance to your potential clients. This may seem counter-intuitive, but the way the law is written, if you or anyone in your institution attempts to help clients clear up some blemishes or inaccuracies on their credit reports with the goal of qualifying them for one of your financial products, you can be sued under a sub-part of the Consumer Credit Protection Act commonly referred to as The Credit Repair Organizations Act.

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At this point you’re most likely thinking, “I work for a lender. We don’t provide credit repair, nor do we work with any credit repair companies. This can’t be true.” The alarming part is that you are not alone in making that assumption. Although the law was drafted to protect desperate consumers from people and entities that would otherwise prey upon them, in practice, it could potentially have a disparate impact upon upstanding lenders and others that work in the financial sector.

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. This article will provide you with a basic explanation of the Credit Repair Organizations Act, give some examples of how it has recently been enforced, and provide some tips on how to avoid potentially putting yourself or your company at risk.

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Credit Repair Organizations Act

Overview

The Credit Repair Organizations Act (“CROA” or the “Act”) is a federal law, which falls under the broader Consumer Credit 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.

Prohibited Practices and Statutory Rights

CROA prohibits deceiving any credit reporting agency or any potential creditor, whether directly, or by counseling a consumer to provide misleading information. Furthermore, it specifically bars any credit repair organization from charging an up-front fee for its services, or otherwise defrauding potential clients.

In addition to prohibitions, CROA also dictates the manner in which credit repair companies must engage new clients. All credit repair companies need to provide a written service agreement to any potential clients prior to performing any services. Specifically, the service agreements must set forth the total amounts of any payments to be made, a detailed description of services, and estimated deadline for completion of services, and the right of the customer to cancel the contract within three business days of execution. Furthermore, the customer must also be given duplicate copies of any form that requires a signature.

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In addition to a written service agreement, credit repair companies must provide a separate list of statutory disclosures regarding the rights of the consumers. Among them are the right to access and correct information on consumer credit reports, the right to sue under the Act, and the right to dispute information found on consumer credit reports. The complete list of disclosures may be found under § 1679c of CROA. These disclosures must be provided to potential consumers independently from any service agreement or other documentation, and must be retained for two years after the consumer signs off, acknowledging that they were, in fact provided.

Penalties for Non-Compliance

CROA was drafted to be narrowly interpreted. What this means is that any contract that fails to strictly adhere to all requirement set forth in the Act is automatically void; it cannot be enforced in any state or federal courts. Furthermore, the consumer may not voluntarily waive any provision of the statute, and any attempt to do so will be void as well.

Aside from contract enforcement issues, the statute also allows consumers to sue credit repair companies if those companies violate the provisions of CROA. In addition to being liable for all fees collected under the service agreement, credit repair companies who violate CROA will be liable for any financial harm sustained by the consumer, attorney’s fees, and potential punitive damages. The punitive damages, as the name indicates, are meant to punish companies that violate the provisions in the statute. Although the statute does not set forth a specific amount, factors taken into account when deciding an appropriate award are: 1) how often the company violates the statute; 2) the type of violation(s); 3) whether the violation was intentional; and 4) the number of consumers affected by the violation.

So what? I already told you that I don’t do credit repair.

Many lenders have this reaction after being forced to read through the seemingly irrelevant, dense legalese, above. However, few ask the fundamental question that really puts everything into perspective: How does the law define “credit repair organization”? The answer surprises almost everyone who is not intimately familiar with this law.

A “credit repair organization” is obviously any person or entity that provides a service with the aim of improving a person’s credit. However, the law also deems any person or entity that provides any advice or assistance to any person with the goal of improving their credit is a credit repair organization. That’s right. If you, as a lender, provide advice or assistance to any potential client in order to help that person improve his or her credit to qualify for one of your products, your organization falls within the definition of a “credit repair organization”.

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 the statute, not only are they subject to potential law suits from consumers and the CFPB, they are also at serious risk of losing the ability to pull credit for violating the terms of service agreements.

CFPB

The Consumer Financial Protection Bureau (commonly known as the CFPB) is a governmental agency that was formed after the 2008 financial crisis. The agency was established with the aim of protecting consumers from deceptive and unfair trade practices, and operates with the goal of acting as a watchdog and consumer advocate across a wide range of industries, which includes the prosecution of CROA violations in the credit repair industry. The CFPB has made itself a prevalent force in recent years by vigorously prosecuting violations of the law. When the CFPB gets involved, those companies that find themselves in its crosshairs are usually subject to hefty penalties. Below are two examples of recent cases in which companies were sued for violating the law.

CFPB v. Commercial Credit Consultants, et al.

In June 2017, the CFPB filed suit against three companies and two individuals in the U.S. District Court for the Central District of California. In its complaint, the CFPB alleged that the defendants charged upfront fees, made misrepresentations about their ability to remove negative entries on credit reports and ability to improve credit scores, failed to adequately disclose the terms of their “money back guarantee”, and misrepresented the costs of their services. On June 30, 2017, the Court entered an order granting an award of $1,530,000.00 against the Defendants.

CFPB v. Federal Debt Assistance Association, LLC, et al.

In its most recent filing against credit repair companies in Maryland, the CFPB coupled its consumer protection allegations with violations of the Telemarketing and Consumer Fraud and Abuse Prevention Act. In the Complaint, three companies and two individuals were accused of deliberately misleading consumers to make them think that the defendants were affiliated with the federal government, falsely advertising that they could reduce consumer debt by at least sixty percent, encouraging consumers to stop paying debts without advising as to consequences of non-payments, and collecting up-front fees for their services. This case is still pending as of the date of this publication.

Credit Reporting Companies

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 and/or cases in which the CFPB is prosecuting claims of statutory violations. In fact, this view is so prevalent, that some credit reporting agencies have even incorporated prohibitions on working with credit repair companies into their contracts with lenders.

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. These prohibitions are commonplace in the contracts across the industry, and have the unfortunate effect of preventing lenders from forming partnerships with credit repair companies to help their prospective clients begin taking steps toward credit-worthiness. This also means that if you or your company do, in fact, provide the type of assistance or advice contemplated by CROA, you could very well lose the working relationship with credit reporting companies and ability to pull credit, along with it.

Solutions

It would be very simple to just swear off companies that provide credit repair, altogether, and conduct business by only marketing to those consumers who already qualify for your products. The issue with this mentality is that, according to a 2016 study published by the Federal Reserve Bank of New York, over one-third of all Americans have a FICO score below 620. If banks simply refused to work with or help these people, they would be, in effect, writing off over 80 million potential clients. That is a very large, untapped market that can’t just simply be disregarded. So, how can you help these consumers qualify for your products and get the funding that they need without violating the law? The answer in short: responsible strategic partnerships that do not run afoul of the law.

Under federal law, not-for-profit companies are specifically exempt from being classified or designated as credit repair organizations. The rationale behind this carve-out is that the primary purpose of those companies is to aid consumers in need, rather than maximize revenue. Referring unqualified consumers to one of these non-profits is a great way to ensure that the your potential clients receive the help they need, while simultaneously growing your pool of qualified applicants.

When choosing a partner, it is imperative that you 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. The company should focus on educating the consumers so that they are able to understand ramifications of their financial decisions to ensure responsible borrowing in the future, which will help consumers and lenders, alike. By referring these potential clients to these non-profit companies, lenders can insulate themselves from potential liability and help consumers get the assistance they need to become financially healthy.

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