Loan originator compensation is complex. Despite the Consumer Financial Protection Bureau's 2014 changes to loan originator compensation requirements under the Truth in Lending Act (Regulation Z), there is still tremendous flexibility in how lenders can legally compensate their LOs.
This flexibility is crucial for lenders looking to attract and/or retain top talent. However, without a proper system in place to manage the myriad of compensation plans a lender may have in place, pay day can easily turn into a nightmare for the payroll department and LOs.
In a recent survey conducted by mortgage technology vendor Floify, compensation is the third-most important factor LOs consider when evaluating a lender for an employment opportunity (1). With compensation rating that high on an LO's list of criteria for a potential employer, it is critical for lenders to be able to offer a new LO a compensation plan tailored to that LO's desires...and within reason, of course.
While LOs have traditionally been paid on commission only, many lenders have begun offering new LOs a minimum guaranteed salary during the initial onboarding period (usually two to four months). From there, some companies simply write off the salary as a cost of onboarding a new employee, while others recover that salary out of the LOs future commissions in what is known as a recoverable draw. In addition, many lenders use this methodology to recoup other LO expenses, like subscription fees for third-party applications, salaries for an LO's assistant or marketing expenses.
Keeping a real-time, accurate accounting of an LO's draw balance would be challenging in the best of circumstances, but there are other compensation factors at play that must be accounted for in the calculation of commission. Basis points per loan remains the rate at which most LO commission is calculated, but where lenders have gotten creative is by layering on additional criteria to create the compensation structure. These criteria include:
--Referral source (self-generated, branch, marketing campaign, builder)
--Quality of loan files submitted
--Loan Purpose (purchase, refinance, construction)
-Metropolitan Statistical Area*
*These last two are ones in which lenders need to exert particular care in how they apply them in a compensation plan, lest they run afoul of Fair Lending rules.
Regarding loan type, many lenders have chosen to create salaried positions in which the LO only originates less-profitable products like reverse mortgages, Home Equity Lines of Credit, bond-funded loans and construction loans to avoid having to pay out more in commission than the loan will ultimately bring in profit. This is permissible. What lenders cannot do is incentivize LOs monetarily for one loan type over another, as this could imply that the lender is encouraging their LOs to target specific borrowers to the exclusion of others and would be a violation of the Fair Lending rules.
It's been a long-accepted practice for multi-state lenders to allow market conditions to dictate compensation for LOs and branches located in different states, but market conditions can also vary across, or even within MSAs. As such, some lenders are offering different compensation based on the MSA where the LO or branch is located, and others are even segmenting compensation based on market conditions within segments of an MSA.
In these instances, lenders must be sure to thoroughly document the reason behind the differentiation to avoid the implication of redlining, which is verboten under Fair Lending rules. Lenders would also be wise to seek a legal opinion on this type of compensation criteria, just to ensure they have a legally defensible position, should questions ever arise.
Nonetheless, even with the guardrails that the LO Comp and Fair Lending rules provide, there is still tremendous room for flexibility in designing an LO comp plan. According to the latest data from the Conference of State Bank Supervisors, there are roughly 145,253 mortgage loan originators licensed through the Nationwide Mortgage Licensing System (2). That is a lot of compensation plans to track, even if the plans are similar in nature, because each LO's pipeline is going to vary, and those variances are what make LO comp such a complex function.
As is often the case when there is a set of data to track, lenders tend to fall back on the old stand-by--spreadsheets. However, LO comp is an area in which spreadsheets simply don't cut it. While spreadsheets allow HR and payroll to track the data points that ultimately determine an LOs compensation, there are few efficiencies gained using this method.
Not only do spreadsheets prevent LOs from having a real-time estimate of their compensation, it also requires tremendous amounts of effort from the HR/payroll team on a nearly daily basis to so that, come payday, everyone's paycheck is accurate. In some cases, lenders will have multiple payroll personnel, each assigned to a different region, and because of the complexity of their various LO comp schemes, those employees may have to spend multiple days on site at each branch in their region during every pay period to ensure compensation is calculated correctly.
If there was ever a case to be made for automation, this is it. By using an automated system designed specifically to track compensation, lenders can streamline their back-office operations while remaining both compliant and creative in terms of their overall compensation schemes--all of which enables lenders to remain competitive when attracting and retaining LO talent.
Who says you can't have it all?
1. Floify, 2016 Loan Officer Recruitment and Retention Study: State of mortgage industry loan officer attrition and retention, p. 12, November 2016, https://floify.com/blog/announcing-2016-loan-officer-recruiting-retention-study.
2. 2016 NMLS Mortgage Industry Report, p. 3, March 20, 2017, http://mortgage.nationwidelicensingsystem.org/about/Reports/2016 Mortgage Report.pdf.
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