The low-down on LO Comp for low-margin mortgage loans
I recently had the pleasure of participating in a Lenders One cooperative webinar on the topic of loan originator compensation. Joining me on the panel were Justin Wiseman, AVP and managing regulatory counsel for the MBA; Pete Mills, SVP of residential policy and member engagement for the MBA; and Richard Andreano, partner at Ballard Spahr. The relative merits and compliance risk of various LO Comp strategies continue to be a hot topic of discussion and over 120 listeners joined the mid-day call.
Lenders want to know how they can simultaneously push production up while protecting their bottom line. It is a tough puzzle to solve, and every lender’s situation is different. The ongoing questions around what’s allowed and what’s not allowed continue to reveal new ideas that can be leveraged to manage compensation and ensure incentives drive the desired results.
In my experience, lenders are keenly interested in how other companies are dealing with the current market and landscape. Their curiosity stems in part from the widespread concern that top performers are susceptible to poaching by competitors that may have a different or looser interpretation of CFPB regulations. But even lenders who aren’t worried about losing talent are looking for creative, compliant ways to improve margins and protect revenues.
Each situation is different, but here are some compensation strategies that may be worth considering in 2019.
Know the estimated LO commission, operational bonuses, and overrides at the time of rate lock and when lender concessions are requested. Having a full picture of the loan expenses will give the lock desk the data they need to make more informed decisions and protect pricing.
Add a low-BPS or zero-BPS first tier level on commission schedules to help recapture fixed business expenses each month, then ramp up the BPS with higher units and volume to reward higher producers.
Establish and define termination rules that pay out less than 100% of the commission if the LO leaves before the loan is underwritten or funded.
Utilize product specialists who are trained on unique loan products such as 203(k) and bond-funded loans and pay the LO a set referral fee to refer loans to the specialists.
Count jumbo loans toward total units and not toward total volume for tier determination or cap the amount of volume that is included for tier determination.
Employ maximum cap limits as an easy way to limit the commission paid out on jumbo loans.
Attribute different BPS rates for each referral loan source and consider only paying the top commission rate for self-generated loans.
Are these strategies compliant under the LO Comp Rule?
According to Wiseman and Andreano, capping compensation around jumbo loans may be the safest bet. The LO Comp Rule doesn’t go into detail on the topic, but capping compensation is in harmony with the spirit of the rule — which is designed to promote fair lending and prevent steering.
I think Wiseman and Andreano put it best when they said a lender’s best defense is to ensure compensation plans are deployed with the borrower’s best interests in mind. If a compensation strategy appears to drive borrowers to loans that best compensate loan originators, auditors are likely to interpret CFPB guidance with prosecutorial discretion. Our industry’s goal is to help make homeownership a reality and put borrowers into a loan product that’s right for them, irrespective of the compensation the LO would receive.
Time ran out before we could answer all the questions webinar attendees had about the strategies that were shared. Let’s keep the conversation rolling. What LO Comp strategies are you considering for 2019?
If you’re looking for a platform that is flexible enough to support all your compensation programs, let’s get in touch — we’d love to show you what CompenSafe can do.