Direct mail is the only marketing channel that ensures that you are reaching your target audience, ensures that the person who is applying is compatible with your product and risk appetite, and allows you to manage fraud.
All direct mail marketing should begin with aligning your campaign and underwriting. After you have identified the candidates who fit the qualifications for your campaign type, you will then send mail to the list of compatible prospects, and wait on their response through phone, website, or visitation of the lender’s physical location. Once you have acquired the response of a client you can begin to either decline, or approve and fund them. This process may seem simple, but the underwriting alignment aspect can easily be disrupted.
Improper underwriting can cause risk managers to select records that would likely be approved for a loan, but they rarely respond to the offer. We often see lenders who have excellent response rates but extremely low origination rates due to database selections that are too lose. Remember, the first rule for any marketing is being certain that you’re matching the right offer to the right audience.
Lenders must find a balance between responsiveness and risk
Having this out of balance can be catastrophic to results. Risk and marketing departments need to work in tandem and not in silos, which is often the case. In order to achieve optimal results, you must constantly tug and pull on the underwriting criteria and analytics along with the response criteria and analytics. Lenders tend to have a loose idea of their audience by the underwriting criteria they have in place for their products. However, that doesn’t mean that the criteria are predictive of a response or that everyone that meets that criteria will use your product in the same way.
All vertices of lending have an underwriting process, and each one contains different data, different policy rules, different risk appetites, etc. Finding the right credit profile depends on the industry and the product that you’re trying to sell. For example, a subprime candidate will have a lower credit score, causing them to be a higher risk and higher interest client, whereas a prime candidate will have a higher credit score and be of a lower risk and lower interest.
Underwriting is a funnel
Aligning your interest with your company’s ideal clientele and risk appetite guarantees that you will be targeting the appropriate market for your campaign type. To do this, lenders should think of underwriting as a funnel; at the top of the funnel, you have the responses from your marketing efforts. Responses are derived from mass media channels such as television, and radio, or are targeted such as social media and email. As you go further through the funnel it begins to get narrower, this is when you start weeding out potential clients based on their credentials. If the underwriting criteria you have in place is over-restrictive or too lax it can cause too many, or too few prospects to get through; this can become an issue when selling your product because it can draw in clients who do not fit your risk appetite or prospects that are overqualified for the offer. Bear in mind that response is a key indicator of a successful campaign; however, the alignment process is vital because it leads to the approval and funding of a client, and since the goal of every lender is to put money on the street and make more profits out of interest, confirming that you have clients who are reliable and able to meet your campaign requirements is crucial.
Errors can occur when there is a misalignment between direct mail and underwriting; this can be catastrophic due to the legal implications that are dependent upon the campaign type. For example, mixing up a credit prescreen campaign candidate and an ITA candidate due to a misalignment would be extremely detrimental to your business by affecting your KPIs and introducing legal and compliance risks.
Cost per funded loan
The most important of the KPIs being the cost per funded loan (CPFL) and cost per dollar loan (CPDL). The reason for this is that ITA does not give the candidate an offer, whereas a credit prescreen requires you to give the potential client a firm offer of credit, and the only reason to decline is fraud, lack of proof of verification, or their credit profile has changed. This means that a credit prescreen comes with a lot of legal compliance consideration and legal compliance risk, which is why it is critical that the prescreen logic being used for selection is completely aligned with your company’s underwriting risk policy and direct mail marketing. Other underwriting mistakes such as unrecognized bankruptcy risks, incorrect loan to value assumptions, unstable clients, and the denial of good loans are costly for lenders. Underwriting is an extremely important and complex component of the marketing process and the quality should never be sacrificed for the speed of the campaign.
Money on the street
It is important for lenders to be putting money on the street because no lender wants unused capital, and the best way to put capital in the hands of borrowers quickly, and effectively, is making sure that all of your direct mail marketing campaigns are aligned with the respective credit profiles and product/risk appetite. Underwriting should be at the beginning and end of any successful campaign. It allows lenders to be able to determine if the loan requester meets the criteria to be accepted, which allows lenders to decline, automatically decline, approve, automatically approve, refer, or right size the loan or credit offer; it also minimizes fraud, income inefficiencies, verifies reliable employment, verifies that the loan application information is true, analyzes the consumer’s credit history, and significantly reduces your risk of violating legal and compliance consideration, and legal in compliance risk. Underwriting alignment is a difficult task to perfect, but it is not impossible if your company is properly utilizing underwriting tools and has a marketing team working directly with their underwriting team.
Pablo Gonzalez, marketing coordinator and account manager, and Linda Didio, SEO & content specialist, at Lending Science DM.