Mortgage Lenders Are Branching Out to Control Expenses
Following the financial crisis, the net branch model all but disappeared. As of late, however, lenders are expressing renewed interest in this once-disreputable business model, and frankly, we’re not surprised. Lenders are being squeezed by tightening margins and, as such, looking for alternative strategies to control their expenses, especially compensation.
One of the benefits to the net branching model – and the reason why lenders are beginning to reconsider it as a viable option – is the ability to control profitability through compensation.
Most businesses have the right to set salaries and bonuses according to how the business is operating, how much money is coming in and the profit that it is able to derive. Because mortgage companies are so heavily regulated, they cannot utilize these same strategies to responsibly manage profit margins. For instance, lenders are not free to set or change commissions structures according to overall business performance because of LO comp rules. So, even if a loan begins to go south and a loan pricing concession must be made, a lender still cannot waive or reduce commission. It’s not good business sense to do these types of loans, yet in some cases, it’s required even if the result is a loss.
Despite the stigma and steep challenges faced by net branches, a number of them have achieved success while operating fully above board. So, many lenders want to know:
- How are other companies doing it?
- Are they in some manner paying out with their profits?
- How are they recapturing producer expenses on items such as loan concessions, marketing expenses and borrower experience portals when costs have gone through the roof and the margins are very small?
There are multiple ways for lenders to control expenses in a net branching model. Well written and thoroughly documented commissions agreements establish clear expectations that allow lenders to smoothly carry out their business plans and stay profitable. Under this model, it is critical for the branch manager to be non-producing, meaning that they cannot be involved in the day-to-day operations of loan-level decisions. As long as that boundary is clearly defined and enforced, these non-producing branch managers can be paid on overall branch profitability, which is often a powerful motivator for entrepreneurial-minded managers.
For a producer, not much changes under a net branching model, other than the lenders’ ability to directly control for commission and BPS paid out per loan, and this can be done in a variety of ways. One of the best ways to manage commission expenses is to align the commission payment structure with the lead referral source of a loan. So, if a loan is brought in by the lender, the commission paid to the loan originator (LO) on that loan is lower than if the LO had self-sourced the loan.
Another way to manage net branch costs is to deduct a flat charge, per payroll period or per month, to cover the variable expenses of services and tools that individual loan officers elect to use, such as software subscriptions or marketing efforts. As a reminder, not all states allow business expenses deducted from payroll. We recommend clients consult an attorney when crafting these types of terms into compensation agreements.
Automated compensation platforms like CompenSafe can aid lenders in their endeavors to run a compliant, profitable net branching model by streamlining compensation management and providing transparency into commissions and branch profitability. By providing a singular view into a branch’s pipeline and commission reports, CompenSafe enables lenders to manage branch efficiency and profitability while ensuring compensation is executed compliantly. CompenSafe also provides lenders with the ability to add automated recoverable draws to commission calculations, ensuring that lenders are able to accurately recover expenses while providing an audit trail for compliance.
Looking to branch out? Contact us to learn how CompenSafe can help you run a compliant, profitable net branch.