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Here are the Top 5 Issues Lenders are Facing With Loan Officer Compensation

tightenup-on-moneyAs lenders gear up to attract new loan officers (LO),  many have them are requesting unique or complex compensation plans. The real challenge lenders face is adapting their compensation plans to these requests, while complying with Consumer Financial Protection Bureau (CFPB) standards.

Joe Ludlow, VP at Advantage Systems shares his insights about the recent trends he’s seen in loan officer compensation, and offers best practices to lenders to meet compliance standards, while attracting the most talented loan officers.

MReport: What trends are you seeing in terms of loan officer compensation?

Ludlow: The trends that we’re seeing with loan officer compensation right now relate primarily to being creative within the Dodd Frank rules. And then also, a higher interest in making sure you have a system that’s auditable and can be reviewed in the event that you have a regulatory audit down the road. So it’s really two things: flexibility and auditability. Those are the two things that seem to be driving most of the decisions right now. On the other hand, it needs to be great from the loan officer’s perspective, because we need to attract loan officers.

What’s really happening in the industry is the decision about the compensation plan is made between the recruiting sales manager for the retail mortgage compensation and the prospective loan officer.  These arrangements are made almost with accounting and procedural commission calculations as an afterthought. The beleaguered accounting department gets this compensation plan for LO compensation for a new LO that they didn’t get a chance to comment on. And that’s a very simple example, but the complexity of it goes far beyond this.

Another big trend we’ve seen lately is different compensation plans based on the source of the lead. So in a given mortgage compensation any, you have a compensation any marketing strategy where they’re out advertising in the marketplace. Oftentimes, because there are costs associated with any compensation any-driven market program or internet-based marketing program, a lot of times the compensation paid to the LO for leads that come from that source is less than if the LO goes out and finds it on their own. So, that’s another factor that can contribute to when they hit a tier or not. The mathematics behind some of these calculations is extraordinary.

Never underestimate the creativity of the American loan officer. Within any regulatory structure, they will find a way to squeeze a few extra dollars out of each deal if they can get the mortgage compensation any to agree.

MReport: What if the loan officer is working in a team, where there are three loan officers that share all the deals? Perhaps a senior and two juniors?

Ludlow: This is becoming more and more common. So then you either split the loan up and calculate the commissions, or calculate the commissions for the senior guy and then split it up afterwards. Either way, you have to give them the options.

In many cases, you have a branch manager that has five loan officers working within their branch. That brand manager might negotiate for what we call an override on the production of the loan officers that they manage. So a branch manager might be paid as a loan officer, and then get a second paycheck where they’re paid an override as the manager of the compensation based on the productivity of their business unit.

MReport: What kind of compliance issues are you seeing among these lenders, in terms of LO compensation? How can they adhere?

Ludlow: For us, compliance is based on reviewing the compensation plans in our system, looking at the reports of the compensation plans in our system and making sure that your compliance officer agreed that these were compliant. Because, the definition of what’s compliant continues to change. You’d think that by now we’d have the rules well defined, but they’re not, so most mortgage companies have a compliance officer of some sort whose job it is to review these things and make sure they’re compliant.

I have begun to see retail mortgage firms where they are providing a minority partnership to a loan officer in an effort to allow that loan officer to earn more beyond what’s consider just a straight sales commission as a member of the ownership of the compensation any. So, in fact, the income on the loan was taboo in the Dodd Frank world, but if you’re a partner in the compensation, you’re entitled to participation in the income of the compensation. Now, the whole concept of income is coming back into the conversation, which tends to throw the whole compliance issue on its ears.

We instruct and provide best practices to those companies to intend to be compliant, until we started to see this partnership stuff come out. And now this is a trend, and so who knows. Fortunately, we were ready for it. From a technology standpoint, we can provide it any way we want to do it.

MReport: How does tech play into compensation?

Ludlow: All these calculations I’ve described as trends can be calculated in our system. So, what’s happening is when a loan officer signs on, if you’re an AMB user you set up the LO in AMB as an LO, who will be paid through the compensation module. And then as loans are defined as being closed, whereby the loan is recorded as an asset on the books, then the compensation system then produces a report saying, based on the two week timeframe or whatever date range you want, here are all the loans that closed and the compensation as it should be paid to the Los and it produces a report – a variety of different reports. Some of them are meant to be distributed to the Los, some of them are meant to be distributed internally to managers, different reports. So the idea here is that regardless of how complex or how your compensation  structures follow the ever-changing fashions in the mortgage community, AMB will then – you can set those compensation  structures up in AMB and then AMB will look at the loans that funded and produce a report that tells you what your compensation per LO should be.

Why is this important? Because loan officers – it’s very important to loan officers that they have an easily understandable and every detailed report that shows them why they’re getting paid what they’re getting paid. A loan officer won’t just take your word for it. They need to see why you’re paying them what you’re paying them for the loans that they did.

So our technology is the engine that does that. Without our system, if you have a relatively complex compensation plan, and you’re doing several hundred loans a month, without our system it’s probably costing you an extra salary just to deal with these compensation issues in spreadsheets on a bi-weekly basis. And that’s kind of a tax on the compensation any. With our system, which is always less than the cost of a new employee, it’ll do it for you in a very automated way and it will distribute through our web reporting tools, it will distribute through email. Of course, there’s another added benefit to doing it our system, which is it is under the control of the accounting department, so the accounting department can create a controlled environment so that branch managers and loan officers don’t have direct access to the calculations.

Well what if your compensation arrangement was very complicated and there were 8 different types of loans you could do, based on different sources, different types of loans, so 8 different ways you could get paid. You’d want a report that could show you exactly which loans you did and which ones you got paid on and how–to compensation are to the arrangement that agreed to when you signed on. So that’s a very complicated process. AMB creates those reports and sends them out–takes the confusing element out of the process.

I’d like to emphasize one thing: Compliance has been an important part of this whole process here–making sure the compensation  plans can be set up in a compliant way and that we survive the audits and that we’re within the rules–but the other side of this is kind of where I started. It’s about loan officer recruitment and loan officer retention. Any business manager anywhere will tell you that the hardest thing to do is to get good people and keep them in any business.

MReport: How do you attract the best loan officers? And keep the best loan officers?

Ludlow: And as this marketplace turns over to a more purchase money driven marketplace, which I think everybody anticipates–the number of refis is probably going to go down, as a percentage, and the number of purchasing loans is going to go up–purchase loans are more loan officer-driven than refis. Therefore, your success as a mortgage compensation any, in large part, depends on your ability to attract and retain loan officers. And proper compensation reporting is a big part of that, because loan officers are in it for the salaries. Everybody works for a living. You’ve got to have great technology to speak to that basic understanding of, I want the best employees, the best loan officers working for me and I need to attract them by, in part, providing great reporting, timely reporting, and detailed reporting about how they’re going to get paid. That’s going to enhance my arrangement with them.

I think this is really–all this compensation stuff is driven in part by compliance issues, but more importantly by the basic market need of attracting great loan officers. Never underestimate the creativity of the American loan officer. I can’t speak for other loan officers in other countries, but that’s how it is here.

Click here to learn more about Advantage Systems.

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