Pushing Changes at Lehman

Here’s another challenge I had working for Lehman Brothers in Nebraska.

Although Lehman Brothers was a highly-respected global investment firm on Wall Street, the same could not really be said of their mortgage-servicing subsidiary, Aurora Loan Services, where I worked as VP of Customer Service.

It seemed that the Midwesterners were deeply entrenched with the policy of doing business “the way we always have”.

Coming from Citi (one of the most profitable, successful & innovative global financial services behemoths) where entrepreneurialism was actively preached & followed, this medieval way of thinking was extremely frustrating for me.

We often said at Citi that the “C” (also our symbol on the NY Stock Exchange) in Citibank stood for “change”.

Here’s a good example of just one of the many challenges I faced.

I used to work very long hours.

In at 8:00 for a staff meeting with my boss & peers, I often didn’t leave until after 9:00 at night when the unit closed for the day.

Even though customer mortgage payments were due on the 1st of every month, it was company policy, and a generally-accepted industry practice, to not charge any late fees until AFTER the 15th of the month (or the end of the next business day if the 15th was a non-business day).

And mortgage late fees are NOT like any late fees you may be accustomed to, either in business or personally.

They are written into each individual mortgage note & represent a certain %…usually, from 3%-6%…of the “total amount due”.

Many times, that could easily exceed $100 as it all depends upon the size of the anticipated monthly payment.

The timeframe from the 1st through the 15th of the month represented the “grace period”.

It was really a gift from the mortgage-servicing company to their customer. Customers, however, simply recognized the 15th as the day to get their payment in…without incurring a late fee!

So let’s  ow guess which was, BY FAR, the busiest day of the month to receive payments.

*looks around to see who has their hand up*

You guessed it…the 15th of the month!

For those customers still living in the Stone Age who sent in a paper check via snail mail, there was always a chance that the payment would arrive late to our PO Boxes, even if they gave themselves 2-3 days for “mail time”.

Most of the time, these customers would claim that they, indeed, allowed sufficient time for the mail to arrive on time.

If the payment arrived 1 or 2 days late, we usually reversed the late fee (actually, “waived” it so it wouldn’t appear on the following statement), even though we “knew” that the customer may have been fibbing.

Question: Why you would even mail in a payment so close to the deadline in the first place???

Oh, I know…you’re a shrewd financier! Gotta take advantage of that almighty float!!!

Instead of immediately handling over your funds electronically…via auto-debit, on-line payments, payments via IVR/Interactive Voice Response…you actually get to keep the funds in your bank account (despite the fact that most customers don’t even have interest-bearing Checking accts) until the check is presented back to your back for payment.

And even if you do get interest on your checking, you earn about 20¢ for those 5 days from when you mail your ~$1500 check to when the check is deducted from your account.

That’s not even enough to cover the cost of an envelope & a stamp!!!

And what financial genius would want to risk a late fee of $50-$100+ for a “supposed” saving of 20¢ (which really costs you money)???

“I’m not gonna let those big companies…those crooks…play with my money!!!”

Some people are so bright that they don’t even need to turn on the lights at night!

*jealous*

I even instituted a policy with my people that if we did agree to waive the late fee, then as a condition for us to do so, we would require that the customer enroll in our auto deduct program.

With this arrangement, we would send payment instructions directly to the customer’s bank & receive the required minimum amount back electronically.

A few customers didn’t like that as we would only perform that function on the 1st, 5th or 10th of the month & customers didn’t want to let go of their funds until the very last minute.

If the customer protested, however, we told them that we simply will not waive the late fee…not now nor in the future.

Faced with that dilemma, just about every customer (for whom we reversed a late fee due to “mail delays”) agreed to enroll in Auto Deduct. My service representatives would handle the enrollment with the customer on the line, with the customer needing to mail in a voided check with their preprinted name & address on it.

This process worked extremely well.

(Note: We did not proactively inform the customer that they could actually cancel the Auto Deduct arrangement in the future. Auto Deduct is really better for the customer as well as the mortgage company so we just remained mum on the subject. If asked, yes, we would give the correct information.)

“Here, take your medicine! It’ll make ya feel better!”

And if you think I was bring a bully, I really wasn’t forced to waive these types of late fees in the first place, except for known instances of mail delays.

Yet so many of my superiors & old time veterans were shocked when I put this policy into play because, once again…

…“we never did anything like that before!”.

Well, I replied, there were other crazy things “we did”…like refunding/waiving over $30,000 a month in late fees…SOLELY for the reason of “goodwill”!

“Goodwill” = there was no legitimate reason whatsoever that caused payment to be late.

Now, boys & girls, reversing a fee for “goodwill” can, indeed, be a business-justified, viable practice if the customer is profitable & you’re afraid of upsetting the customer & losing the entire banking relationship (cutting off your nose to spite your face).

Also, if you believe that you have the opportunity to expand the customer’s banking relationship with this most-generous gesture, then a “goodwill fee reversal” can be theoretically justified as it may open the door for additional sales or sizable deposits.

But there’s a fine line to consider.

Just because the customer yells at your rep does NOT mean that you should reverse a legitimately-imposed fee.

Now I know, for a fact, that many reps do this exactly, e.g., reverse a fee when the customer complains vehemently so they don’t have to take the abuse on behalf of the company. Or, they’re actually unable to properly explain why the system imposed an OD/Overdraft fee (as with bounced checks or paying items against uncollected/insufficient funds).

But with mortgage customers, I saw things a little differently as the situations weren’t the same.

First off, it’s pretty easy to determine if the payment received was late (or not received at all). Didn’t take a great deal of expertise.

Yes, you dealt with incredible fairy tales from the customers, especially if the payment was “only” 1 or 2 days late.

(But, remember, the payment was actually due on the 1st of the month…the mortgage banks created this 15-day grace period with regard to late fees.)

Secondly, we weren’t servicing prime mortgages (customers with excellent credit ratings who received the best possible rates). Our portfolio usually sat somewhere in the middle between “prime” and “sub-prime”…Class B mortgages.

And these were mortgages, not checking & savings & investment  accounts. There’s no such thing as a customer-initiated transfer to a different mortgage-servicing company. They would have to go to another mortgage bank & apply for a refinanced mortgage…and pay all the applicable application fees & closing costs!

In addition to these upfront fees, there will be a strict credit bureau check…as well as income & asset verification! (Aurora was infamous for booking 100% mortgages…80% first mtge & 20% second, WITHOUT EVEN validating their income nor assets!)

That ain’t happening when you go to refinance!

And differently from other mortgage-servicing companies  like CitiMortgage, or Chase Mortgage, Aurora Loan Services had no other relationship with the customer…there were no Checking, Savings or investment accounts under the Lehman Brothers.

In all reality, the overwhelming majority of our customers weren’t going anywhere!

I wasn’t really worried about “forcing” the customer into a monthly Auto Deduct program if their payment was a day or 2 late…as I was reversing a significant late fee & the customer really wasn’t in a position to refinance elsewhere.

But, despite my rationale, there were many raised eyebrows.

(BTW, the program was INCREDIBLY successful. Then, I began monitoring which service reps were still reversing late fees due to “good will”. Many still used it as a crutch to avoid having customers “get really mad” at them.)

I took one step further & completing disabled the entire fee reversal functionality on the system for most of my people…only managers & designated senior reps, i.e., the Escalation Unit that handled help calls from the reps as well as escalated service situations, had the system’s capability to reverse a fee.

The reps were happy & the entire fee reversal function resided with a defined, much-smaller group of people.

For those readers out there keeping score, our monthly fee reversals due to “good will” was reduced from $30,000+ a month to less than $300 monthly!!!

And I even had issues with the $300/month as I was able to review EVERY fee reversal…which I did…and I wanted to hear the rep’s rationale as to why they believed “goodwill” was appropriate.

We were now saving the company over $360,000 in hard money! These weren’t gross sales numbers…these were actual hard $ saves!

But it seems like I may have digressed a bit…

The original point I was intending on making involved those last-minute electronic payment requests that we would receive on the evening of the 15th of the month…the last possible time to get the payment in before the cutoff time for same-day posting.

Since we were located in Scottsbluff, NE, we were in the MT/Mountain Time zone.

Other than us, Denver, and a couple of ol’ mountain goats, not a lot of people live in the Mountain Tine zone.

OK, maybe a slight exaggeration there, but not much.

Without a doubt, other than Hawaii & Alaska (which are outside the normal Eastern, Central, Mountain & Pacific time zones & where, incidentally, we had no mortgages), the Mountain time zone is, by far, the least-populated of the 4 in the continental U.S..

Furthermore, the other 3 time zones, contained over 98% of our portfolio: Eastern (concentrated most in NY & FL), Central (mostly in TX) & Pacific (primarily CA).

So with 98% of your customers OUTSIDE of the MT zone, let’s guess what time zone we printed on all our customer correspondence & statements?

You guessed it…Mountain Time!!!

That hadda be one of the most UN-customer-centric practices I’ve ever seen in my 35 years in financial services.

Bar none.

The cut-off time for same-day payment processing was 7:00 PM MT…as clearly stated on the customer’s statement.

Quickly now, 7 PM Mountain time is what time in YOUR time zone???

Times up!

Customers (ya know, normal people) are pretty unfamiliar with MT. As a result, customers calling from California from 7:01 PM to 8:00 PM MT MISSED THE DEADLINE on the evening of the 15th!

In California, it wasn’t even 7:00 yet…but in our infinite wisdom, we would print MT on their statements!

I’d hear my reps apologize for this entire 1-hour period with those poor CA customers.

I tried, naturally, to convince the powers-that-be to use Eastern Time instead.

Every company in the US that operates across the country do 1 of 2 things:

– print/use the customer’s local time (according to the account address) on important things like statement & the such, or
– use Eastern Time as the default for all customers.

I was informed that printing the customer’s particular time zone (NY customers would see a 5:00 PM ET deadline; TX would see a 6:00 CT deadline & CA would see a 6:00 PT cut-off) “couldn’t be done easily”.

It would cost a bazillion dollars, take forever to do & of course, the good ol’ favorite…”We’ve been doing it this way for years!”

OK then, let’s use ET like the rest of the U.S. uses!

Everyone knows what ET means in terms of where they are.

If you’re in NY or FL, it’s YOUR time!

TX? You’re 1 hour behind ET.

CA? You’re 3 hours behind ET.

The Rocky Mountain goats with mortgages? You’re 2 hours…BAAAAA (or whatver goats say)…behind NY.

I’m in this big monthly Service Committee meeting with the different Senior Managers from across the site, when I raise this topic for discussion.

NO ONE agrees with my proposal!!!

Not a single person in a group of more than 12.

I talk about the conversations I hear from 7:01 PM to 8:00 PM (yes, Mountain Tine) that my people have every 15th of the month with customers from California.

NO!!!

I tell them that’s how every other company in the country does it (without customizing the time zone printed to the customer’s location or printing all 4 time zones which would look like a mess), using ET as a standard.

NO!!!

I ask them what time is it in NY right now. They look at their phones/watches & quickly answer.

“See? Everyone, regardless of where they are, know what time it is in NY!”

NO!!!

I’m looking around for an ally, someone who didn’t come out from under a rock, but everyone’s against me.

Perhaps I didn’t make things any better by saying, “Did anyone just see Rod Sterling smoking his cigarette? ‘Cause I swear I must be in the Twilight Zone!”

I gave up in total frustration.

I try talking to & convincing people at our HQ in Colorado (yes, MT zone!)…no luck.

Finally, I wrote a lengthy e-mail to the President of Lehman.

Surely, he’ll understand…as Lehman’s headquarters are in NYC!!!

Yes, in the Eastern Time zone.

Surely, he’ll understand!

I don’t get a response.

However, about 6 weeks later, in February of 2008, a memorandum comes out to every Lehman employee.

In so many words, it says, “Unless your customer base is located completely within a single time zone, in which case you should use that particular time zone when including the time of day in all customer correspondence, you MUST begin to use ET/Eastern Time as the standard in every applicable piece of customer communications, including statements & bills, EFFECTIVE IMMEDIATELY”

Victory at last!

It would have been really nice had he acknowledged my e-mail several weeks earlier so I could shove it in everyone’s face at the next Service Committee meeting.

Instead, I printed out the President’s memorandum…as well as my e-mail to him on this exact subject from a few weeks prior.

I proudly stood up & showed everyone his Eastern Time zone memo at the Service Committee meeting.

They sheepishly acknowledged that everyone had already received it.

I responded by saying, “This is EXACTLY what I was trying to convince you guys that we should do. But all I heard was ‘No, Mike!’. Everyone remembers that, right?”

Then I held up the 2nd sheet of paper.

“This, my friends, is the e-mail that I sent to our President about 2 weeks after our Service Committee meeting on this very topic. And you’ll notice that I requested systems notification when it was read…and if you look closely, you see that it was, indeed, received by him at 11:09 ET on December X, 2007!”

“I’m just trying to make this company better. I have almost 30 years of leadership experience with Citi. I’ve created, designed, implemented & managed stuff that a lot of people here have never heard of before. I’m not bragging. I’m just fortunate enough to have grown up in a very progressive & aggressive corporate environment and all I want to do is try & share those learning experiences with you. We can skip through some of the basic steps when evaluating a new proposal as this stuff already works in the real world.

And for those that keep telling me, “This is how we’ve always done it!”, I don’t wanna be disrespectful or anything, but when I open the book of ‘America’s Greatest Companies’, we’re not listed there. We have a lot of room for improvement.”

The meeting then continued.

And, I swear, I was NOT smirking the entire meeting! OK, maybe on the inside…

As always, Thank you so very much for listening!