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  • Writer's pictureRick Haskell

Dipping Your Toe in the Water

Subprime lending gets a bad rap. For those lenders who like staying in their “prime” comfort zones, this article is for you. Sure, it may be far too risky and expensive to completely retool your operations for subprime lending. But a slow, strategic migration into near-prime, when done correctly, is inexpensive and will have very high odds of success—it just takes the right planning, plus the right software.

I had a call last week with a credit union who said they struggle to grow their loan portfolio because their customer base is a closed consumer segment as defined by their charter. I asked if they have considered dipping their toe in the water, just a little bit, toward near-prime borrowers. They looked at me like I had leprosy.

Coming from a subprime auto background, it cracks me up how easy prime credit lending must be. But all of us can probably agree—businesses that are easy are leaving money on the table! Imagine a lender who only approves FICOs > 750. First of all, you don’t have to risk the farm by creating a narrow testing segment between 725 and 750. You just need a little planning and setup.

The idea is to increase your approval rate just enough to grow your monthly loan originations by X% (probably not more than 5 to 7% in this first effort). You do this by taking the FICO limit down a bit, and with secured loans, bolster the qualifying criteria with tighter offsets around preferably deal structure elements (e.g., slightly lower LTV requirement in this new segment). These new approvals need to be clearly marked, but that doesn’t mean you need to create an entirely new loan product. You’ll probably want to consider a slightly more rigorous verification process upfront for these. And you’ll surely want to increase your APRs just enough to offset the increase in expected loss for this segment. For some of you, this may be your first implementation of risk-based pricing—congratulations, and welcome to the future!

But is that all? If we’re talking about the loan origination process, yeah—pretty much. Now I can already hear some of you grumbling about how delinquencies are going to rise and how you’ll need to hire more collections staff. But here’s the thing… if you are using today’s advanced software tools to drive efficiencies in your collections process, you will NOT need to hire more collectors. Read on…

In this day and age, a revolution is happening that’s transforming just about every industry. It’s time to get serious about data driven efficiencies within your own organization. The larger, enterprise lenders and loan servicers started this transition more than a decade ago, but it was only made possible by writing their own “home grown” software in-house. Ironically, many of these same lenders are now sitting on this weird phenomenon of antiquated software that can do modern-type functions around driving efficiencies. Trouble is, many of those outdated platforms are nearing end-of-life. Plus, it’s difficult and costly to run a software business inside a lending business.

Enter Lendisoft, the first 100% cloud-based LMS that’s both affordable, modern, and brings risk management efficiencies to your front door. It's scalable, vastly customizable, accommodates the “potential DQ” method of collections based on cycles delinquent, supports all the risk management capabilities that mature, “home-grown” solutions have, and is entirely “no code” required, so your business executives can fly the ship. You can create limitless strategies using our campaign builder, which affects calling queues, texting campaigns, and email campaigns. Campaigns can even be divided into champion/challenger segments, so you can experiment with different strategies in parallel to learn without a doubt which is the most efficient from an ROI perspective. There are features that allow experimentation around assigning your toughest accounts to your top collectors, and many other “risk-based” tools and features built right in.

It is estimated that with an LMS in place that drives experimentation and efficiency, you can achieve the same monthly collection revenues with significantly fewer staff. Or, given the same staff, you can grow your portfolio into deeper credit segments while keeping payment performance in check.

At Lendisoft, we provide the right software, plus the full-configuration and ongoing consulting to ensure you are on the right path to achieve calculated growth and enhanced profitability.

In summary, make 2023 the year you finally tackle data-driven operations head-on. The process is simple: dip your toe in the water, analyze results, and when everything is confirmed on track, step in just a little bit deeper. And besides the obvious benefit of growing revenues over time, consider the side-benefits of satisfying board mandates to grow, becoming that lender who is more for the people, not the elite (1%), and perhaps even qualification for government subsidies for serving a more challenged community within your chartered ecosystem. The point is, serving after the greater good should be on everyone’s charter—and with the right planning and software in place, you will be poised for success. Let Lendisoft show you how.

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