Shopping for a subprime lender? Focusing on traditional measures of value, such as loan volume and the size of the servicing portfolio, might not be enough.

Observers say bankers need to get a grip on a prospective partner's executive compensation packages and customer service practices.

Subprime lenders, unlike most conventional mortgage lenders, typically pay chief executives according to the loan volume the company generates.

This approach jibes with the entrepreneurial spirit of most subprime companies-but it carries risks. "Long-term management is being sacrificed in pursuit of near-term objectives," said Roger W. Merritt, a senior director at Fitch Investors Service, New York.

Bankers should also visit a potential partner's customer service center before striking a deal. The reason: Quickly calling borrowers who miss payments is vital to subprime companies. Though conventional mortgage companies might wait a few weeks to place a call to borrowers in arrears, subprime lenders must be able to hit the phones immediately.

Site visits can also help bankers immerse themselves in the day-to-day operations of their subprime candidate to see how their operations are different. This advance work will minimize culture shocks after the sale and should demonstrate why these entrepreneurial companies should retain relative autonomy, observers said.

"It can be very challenging to try to put a saddle" on subprime companies after a deal is done, said Anthony J. Santilli, chairman of American Business Financial Services, Bala Cynwyd, Pa.

Mr. Santilli knows. He spent 25 years as a commercial banker before his company bought a subprime lender last year. The experience has not been without bumps, but Mr. Santilli says that banks and subprime lenders can co-exist.

His advice to banks thinking of taking the plunge: "Look very closely at whether or not your philosophies are compatible. You can't buy one of these companies and not expect it to continue doing the things that made it successful."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.