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The Correct Response to Changes to LO Compensation

Stewart Hunter and Jim McMahan
Mar 01, 2011

Change is hard. But failure to adapt to an industry that is changing around you can be fatal. This April, we’ll see some lenders go through some hard times as they struggle to get new loan officer compensation packages right. We’ll also see their producers exit these companies. The difference between these two types of mortgage companies lies in their response to this sea change in our industry. The new loan originator (LO) compensation rule that is set to be implemented in less than a month will no longer allow brokers or loan officers to be compensated by yield-spread premiums (YSPs) or fees to both the borrower and the lender. This presents a problem in how to compensate good loan officers, especially, as some claim, since the new regulation does not provide sufficient or proper guidance on how to comply. Some people are undoubtedly hoping for some miracle that will keep this from taking place. But there can be no escaping that this is going to happen, and the only say we have in the matter is what attitude we take in our approach. We have the option of embracing this as an opportunity for growth or ignoring it and letting our loan officers and brokers fall by the wayside. Like anything else, this new regulation is a chance to educate ourselves and lead through the change. It’s our position that those who embrace this will gain a competitive advantage. Those who fight it are going to be left out. That’s the approach we have taken, and I’m very confident that by carefully considering this problem from the perspective of the borrower, the bank, the regulator and the loan officer, we will keep our company competitive through this confusion by being able to craft and communicate a clear compensation plan for the best-in-class loan officers. One way for good loan officers to approach this problem is through reverse engineering. Let me tell you what I mean. There was a time when a productive loan officer could structure his loans in a way that made him the most money. Lenders made this possible because they were desperate for the best originators and it made economic sense to the lender as well … those days are over. Today, a good originator, particularly a branch manager, needs to work backward, taking into account the actual overhead of running the business and then determining what is left when the bills are paid. By sharing as much of these proceeds as possible with the loan officers bringing in the business, companies can grow their businesses in the days ahead. To make this work, it’s important that the company maintain its own secondary market trading desk to make sure that the programs offered will be profitable enough to make a good loan officer compensation plan work. It’s important that lenders fully comply with these new rules, but it can be done in such a way that top originators can be attracted and maintained as long as the company uses this reverse engineering approach. We at Benchmark are preserving our current mindset about how we compensate our originators in the face of the changing rules. We will comply with the law—both the letter and its intent—but we will not punish our loan officers in the process. Our commitment to our branch managers and loan officers will be to pay them at a high level while never compromising our service levels and support. Any bank that wants to be successful going forward will do the same. There is no way around the new regulation, so we may as well welcome it. Let’s focus our energy on making it work, on compensating our loan officers in a way that complies, rather than on trying to fight it off or let it defeat us. We may not all get it right the first time, because anything that is new takes some time to get accustomed to. I believe that if you include your most important assets—your loan officers—in the dialogue and allow everyone to have a voice, your company will reach the best decisions for implementing your new compensation plan. Jim McMahan is president and Stewart Hunter is core values officer for Dallas-based Benchmark Mortgage. You can find them both online at  
Mar 01, 2011