A good role model for lenders

I recently returned from a boat tour in Indonesia and was impressed by the quality of the service provided by the tour company. The employees went out of their way to make the experience a pleasurable one for the customers. Other tour companies we have used in the past were equally good. My impressions are consistent with those of many other travelers with whom I have compared notes.

Afterward, I couldn’t help asking myself why service quality and customer satisfaction in the travel-tour industry is so much higher than it is in the home-mortgage industry. What accounts for the difference?

Repeat business: Successful tour companies generate a very high rate of repeat business. On my recent trip, about 95% of the clients had traveled with the company before. To generate repeat business, you must provide a high level of customer satisfaction. Repeat business is the secret of success because it reduces marketing costs.

In the home-mortgage business, the cost savings from selling to existing clients is as large, perhaps even larger, than in the travel business. Yet the volume of repeat mortgage business is very small. No statistics are kept on this nationwide, but I would guess that on home purchase transactions in which the purchaser has an existing mortgage, the lender holding that mortgage gets the new loan less than 5% of the time.

On refinances, one might expect that the existing lender would get most of the loans. The existing lender (or the lender’s agent) has a continuing relationship with the borrower, has better information about the borrower than any other lender, and is usually able to make the loan at a lower cost than a new lender. Nonetheless, the incidence of repeat business, although larger than on purchase transactions, remains very low.

The repeat business rate is much higher in the travel-tour industry because tour companies can control the quality of their service much better than mortgage lenders. Furthermore, tour companies can convert quality experience by clients into favorable brand identification, which mortgage lenders have problems doing.

Creating a quality experience: Employee selection is the key to providing high-quality service. Tour companies look for affability, subject-matter knowledge and other traits that clients respond to positively.

Mortgage lenders, in contrast, select loan officers who can deliver loans; how they do it, so long as they don’t violate the law, is largely up to them. Successful loan officers are good salespeople, and they are good at establishing relationships with referral sources, especially real estate agents. If there were an objective measure available of the true quality of the service they provide to clients, it would vary from excellent to abysmal, but abysmal won’t get you fired if you bring in the loans and don’t generate any lawsuits.

If the transaction involves a broker, the lender has even less influence over service quality at the point of sale. Brokers are independent contractors; lenders assume virtually no responsibility for their behavior.

In the tour business, furthermore, consumers understand what they are looking for and are quite consistent in evaluating how well their expectations are being met. This is not the case with mortgages, which involve pricing and approval processes that few borrowers fully understand.

Converting service quality into brand identity: Clients of tour companies usually deal with a number of employees on any one trip, and if the experience is positive, it results in a favorable image of the firm. Clients assume that another trip with the same company also will be a good one.

In the mortgage business, by contrast, positive brand identification with the lender seldom arises out of the lending process. Borrowers usually deal with only one person, and if the experience is a good one, it is usually associated with that individual rather than with the lending firm. The lender support services that help smooth the process are largely out of sight.

If the deal founders, on the other hand, the deficiencies of the support services may become glaringly evident and will be associated with the lending firm. From a branding perspective, the lender is largely in a situation of “heads the loan officer or broker wins, tails the lending firm loses.”

From a consumer perspective, the absence of quality branding is very costly. It results in most borrowers not knowing where to go to get a loan, which makes them vulnerable to misinformation from con men and fraud perpetrators.

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The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.