MLO Compensation

Before you read ahead, please understand that I have always valued and loved my Loan Originators. Working with my sales teams has been frankly, the best part of my 35-year career. Quality Loan Originators are invaluable and are a critical part of the home buying process.

There have been a number several recent Linked In posts tied to this topic:

"MBA Panelists express grave concern about the current profit picture"

"Hundreds of Mortgage Exec's ask CFPB to change LO pay rules"

"US Bank launches new strategy to compete with non-bank lenders"

"Loan Officer Comp is NOT the problem"

Let's not bury our head in the sand. Questions to consider....

1) LO comp in terms of basis points has risen dramatically since the 2008 mortgage related recession. Average sales prices (thus average loan amounts) have risen as well over the same time period. Has the general population of LO's raised their level of proficiency, value or contribution at a commensurate level? In a desire to scale, are some mortgage companies still making irrational offers, thus expanding the upward pressure on LO Comp?

2) Many feel that 50% of the LO's compensation is earned for generating the referral/ customer /application and the other 50% is to take the application, client collaboration, packaging the loan and overseeing the loan during the process through to closing. So... as companies shift to FinTech solutions to streamline the process and improve the customer experience, does the above referenced 50/50 equation still make sense? Will the cost impact of FinTech be offset by reduced commission costs? Since LO's rarely meet the borrowers, what differentiates them from a good call center LO that earns a fraction of the external LO commission? If pricing must be adjusted upward to offset the LO commission costs, are the borrowers seeing the benefit vs. additional costs incurred?

3) Mortgage Bankers have aggressively competed for talent which has driven up sales costs. Creating an environment where LO's have much higher expectations in terms of additional compensation and support required; Enhanced compensation packages, benefits incl 401k match, Sales Assistants, Leads, Marketing and Sales Support, MSA's etc. When compensation is discussed only in terms of BPS, we are missing other significant costs tied to the LO. EXAMPLE - One Top 10 mortgage banker has an additional LO cost of up to 74 bps in non-commission related expenses. What is the appropriate percent of total commission / sales related expense vs total expenses for a Mortgage Banker to achieve reasonable profitability?

4) The letter to the CFPB references, and I paraphrase ......'more complex product requires additional time/effort/analysis/experience which should allow the LO to earn higher compensation. This is in place today! LO's that specialize in FHA/VA/Bond loans are generally paid at higher BPS. There are very few LO's that close a significant percentage of higher revenue products that earn lower bps. Mortgage companies allow these LO's to earn higher bps as the net revenue on the product is HIGHER...not solely due to the complexity of the product.

5) Mortgage companies are not profitable!! Are we avoiding the painful (but necessary) shift NOW to LO Comp to help get overall costs to originate in line? Are we being honest with our (external) LO's when we say that the efficiencies and productivity that FinTech provides will have no/little impact in the LO's total compensation?

6) Banks trying to compete with non-banks on LO Commission BPS. The value propositions are very different. While I applaud US Bank for trying something new, opening a Mortgage Banking channel to compete with non-banks makes no sense. They are basically telling their external Bank Loan Originators that they are worth less than non-bank LO's. Also, that the value proposition of the Bank Mortgage Origination unit is inferior to the non-bank lenders offering. Do we expect to see a trend here?

7) Lastly, is LO productivity being considered in the compensation discussion? Why would you pay lower producers on an aggressive BPS scale? FACT - 50% of LO's close 85% of total volume. The typical answer that I hear is the LO could be profitable, or at least break even with 1-2 loans closed per month. If this is true, are you considering the cost impact due to their (likely) lack of proficiency that impacts service and operational efficiency and ultimately a company's reputation?

Loan Originator Compensation is a big, darn deal. It is the largest expense on your P&L. With 2019 expected to look a lot like 2018....is it time to make some tough, but necessary changes now?