The first two months of 2018 have had the LBA Ware team on the road at various industry conferences, and at those shows, we’ve had the opportunity to speak with numerous lenders about profitability challenges that are keeping them up at night. Here’s a sampling of what we’ve heard:
Compensating Branch Managers on Profit & Loss
Many lenders are curious about how to more tightly couple compensation with their bottom line. The question “How can we run a ‘Net Branch’ or ‘P&L Branch Model’?” has come up multiple times recently. Although we hear about this model more than we actually see it in the marketplace, it is still a hot topic. It makes sense that lenders are asking this question. Business owners want to be in control of their net profits (we all have to make money to stay in business) while still complying with a litany of federal and state wage laws, LO comp rules, fair lending laws, etc.
How are we responding to this question? Lenders can pay regional, area or branch managers based on P&L if the individual is a non-producing manager that is also disconnected from the origination and loan-level decision-making process. LOs and producing managers involved in loan level origination must still follow the LO comp rules and cannot be paid on the individual profit and loss of a loan.
Another option for producers and non-producers is to have an agreed flat expense deduction netted from compensation to cover marketing, subscriptions or other services paid for by the company. In all cases, it is critical to have all expense deductions and compensation criteria declared in writing, signed and safely stored for documentation.
On certain occasions, such as lock extensions, pricing concessions, or simply stiff competition, LOs will offer to make a one-time adjustment to their compensation to win a deal. While this is an admirable gesture, it is, unfortunately, not allowed as lenders are required to issue commission the same way on each loan per the LOs compensation agreement. Furthermore, lenders cannot move a loan to another LO with a different comp structure for the very same reason. Otherwise, lenders could, for example, direct all FHA loans to LO No. 1 and all jumbos to LO No. 2, which could expose the lender to claims of violating Fair Lending laws.
Sharing the Cost of LO Assistants
When it comes to building out teams of LOAs under a high-producing LO, many lenders are adjusting the LO’s compensation to account for the LOA, or multiple assistants, handling activities on behalf of the LO. The LOA’s salary and per file bonus can be factors used when determining a loan level allocation to be debited from the LO when an LOA (or multiple LOAs) are involved on the loan file.
When multiple if-this-then-that type rules are in place at an organization, it is crucial to have an automated incentive compensation management (ICM) system in place to document, automate, calculate and track compensation debit and credit transactions.
Bond-Funded or Down Payment Assistance Loans
These loans are typically less profitable for lenders, and under many compensation schemes, lenders could end up paying out more in compensation to the LO than the loan would bring in for profit. While some lenders have LOs that have expertise in these type of programs, Fair Lending rules dictate that lenders cannot direct specific types of loans to specific LOs. As such, many lenders have had to assess the “cost of doing business” for doing these types of loans (lose money).
While some have created salaried positions for LOs to exclusively handle these types of loans, others have set up specialized "desks" in separate offices to keep from running afoul of Fair Lending rules while continuing to offer these types of programs.
What’s clear is that compensation continues to pose new concerns for lenders who have aggressive profitability challenges as market competition for top talent forces them to become more creative with their comp plan design while staying compliant. Automating compensation with a tool like CompenSafe can greatly reduce the day-to-day burden of comp plan management, allowing lenders to tackle the more complex issues they face with comp plan design. If you’re considering a compensation management solution or want more information on CompenSafe, we’re ready to answer all your questions. Click here to get the conversation started.