Entrepreneurialism With a Safety Net (aka Net Branching)Jack DalyEntrepreneur, Housing and Urban Development, HUD, net branching, branches
Here's the opener--how would you like to make more money with
less work? Speaking from 25 years experience in the mortgage
industry, I believe that the net branch structure offers
street-smart, loan-originating entrepreneurs the best opportunity
to increase loan production, revenues and personal income.
In its simplest form, net branching is traditional retail
mortgage banking with a more robust compensation plan for net
branch managers. Responsible and performing mortgage producers owe
it to themselves to explore this new structure.
Prior to May of 2000, many companies had built national call
centers with a specific focus on mortgages and sub-prime niches. As
these niches fell out of favor with the market, these companies
were forced to reassess their alternatives. In order to support the
national call center, all of the necessary licensing and
infrastructure had to be put in place. These companies had to
search for a viable alternative to leverage their "in-place
expertise." For many, this was found in the net branch opportunity,
and the net branch structure is recognized as one of significant
growth and lasting value for competent mortgage professionals.
In May of 2000, the Department of Housing and Urban Development
(HUD) issued a statement restating what constitutes an acceptable
and legal net branch structure. The timing of this statement
allowed net branch managers the opportunity to establish the net
branch structure in full compliance. While the statement specifies
in detail the net branch guidelines mandated by HUD, strict
supervisory control over all employees is at the heart of its
position.
HUD does not have a problem with lenders paying their branch
managers based on the net profit of the branch. Problems occur when
the branch is a separate entity from the approved mortgagee. All
operating expenses, leases and employees must be paid by the
FHA-approved mortgagee. HUD compliance means that if you are going
to originate FHA loans, you must be employed and paid by an
FHA-approved mortgagee. Doing otherwise would subject violating
originators to termination and penalties by HUD.
The net branch concept facilitates Mortgage Bankers to expand
their presence while enabling smaller, local market originators a
greater share in revenue and a broader array of loan products to
offer.
Having operated in both the traditional lender structure and the
smaller entrepreneurial origination environment, I consider one of
the key differences to be in the compensation plans and
commensurate opportunities. A constant frustration is the
difficulty of luring and landing the local "street fighter." The
biggest stumbling block was always compensation! Traditional branch
managers are generally paid a salary and small incentives tied to
production of the branch. The local "street fighter" works without
the safety net of a base salary, yet reaps the profits generated by
the branch efforts. The net branch compensation plan mirrors that
of the "street fighter" with the direct distribution of profits
after expenses are paid. Beyond such compensation, the net branch
enjoys expanded product offerings, expanded geographic markets and
support services. When compared to the traditional structure, net
branch managers double and triple their incomes while enjoying the
opportunities of a more entrepreneurial culture within the safety
net of the parent company.
Net branch owners receive the opportunity to leverage the solid
foundation already in place at the larger lender. This provides a
head start for aspiring entrepreneurs, with an established support
system, as opposed to starting on their own with the matter of
administrivia. The net branch structure is truly a "win-win"
situation.
Operating within the net branch structure, the entrepreneur
"street fighter" retains those attributes that translate to local
market success, while adopting significant back-office support.
Support services provided by parent companies differ from one
organization to the next. The list can appear similar to the more
traditional lender. These support services include:
++nationwide state licensing;
++extensive investor approvals, including FHA, FNMA, FHLMC and
hundreds of others;
++agency net-worth requirements;
++mortgage banking and secondary marketing capabilities;
++warehouse bank lines;
++underwriting, funding, document preparation, including DU/LP
and localized capabilities;
++technology support and help desk;
++employee benefits, including health insurance and 401(k);
++general accounting, accounts payable, payroll and tax
reporting;
++audit administration, including agencies, investors and
states;
++quality control compliance;
++sales and marketing assistance;
++training in both technical and sales; and
++recognition and rewards programs.
Characteristically, small- to mid-sized local originators are
either shut out from such benefits and services, or are frustrated
and distracted by their administrations. Operating within the net
branch structure, the local "street fighter" enjoys such large
company support, yet operates in a more local, entrepreneurial
fashion, creating another "win-win" situation. So, who can be
candidates for this innovative net branch structure? They are
categorized in four groups:
++Existing net branch managers who are not satisfied with their
current relationships, but still recognize the benefits of such a
structure.
++Branch managers of large traditional national lenders who
sense a readiness to undertake a more entrepreneurial
initiative.
++Local Mortgage Brokers who can benefit from the expanded
markets, expanded products, enhanced support services and increased
revenue and profit opportunities.
++Top-performing loan officers who are ready to undertake the
next step of branch management, while retaining the opportunity for
higher income within the safety net of a large lender.
Basically, the parent lender provides the foundation and support
while the individual net branch operators bring local
entrepreneurialism focused on originating and processing loans
profitably, paid accordingly for such efforts.
As for the ideal size, the number of candidates attracted to net
branching continues to grow. The initial profile was a branch
producing 10 or more loans per month while now, many mid-sized
originators producing 50 to 100 loans per month recognize the
genuine P&L benefits of focusing on what they do best and like
best--originating new business. Once again, this is a "win-win"
situation.
To summarize the benefits of net branching for the local
originators, we see:
++increased revenues through 100 percent origination fees,
overage, premiums, and back-end and miscellaneous fees, in addition
to participation in servicing release premiums on FHA loans;
++nationwide state licensing/origination; and
++various support infrastructure.
All of these translate into increased loan production, revenues
and profits for net branch operators.
The net branch structure is a winner for the parent lender, the
street-smart local originator and, ultimately, for the consumer in
terms of broader choice and enhanced service. Hesitation to the
concept by the originator typically results from a resistance to
change or a sense of a loss of ownership. The "street fighter"
originator would be well-advised to seriously research this
relatively new structure. While still in its infancy, opportunities
for all are compelling and opportunistic. In
summary--"win-win."
Jack Daly is CEO of professional sales at Coach Inc. and
Chief Opportunity Officer of Platinum Capital Group. He may be
reached at (800) 523-5363 or e-mail
[email protected].
