Yes, branching has its pitfallsMike Sweigartnet branching, affiliate branches, pros and cons
We see many articles touting the benefits and successes of
branching. Whether you call it "net branching," "affiliate
branching" or just "branching," most programs have many
similarities, although some are very different.
I decided to take an objective look at the pitfalls, or at least
things to consider while making a decision whether to join such a
company. Being a non-attorney, I will not offer legal advice or
opinions. I am only speaking from many years of experience and
specific research for this article.
Legality
If you are considering entering into a branch relationship, you are
obviously looking toward the future, and do not want to enter into
an illegal system or one that will disappear in six months. Not
every branch operation is created equally. Some use it as a means
of renting a license. You might think twice before you sign up with
a company that says, "Pay me a monthly fee, and I will get you
licensed and you can do what you want." That is not an "acceptable
arrangement" according to the U.S. Department of Housing and Urban
Development in Mortgagee Letter 00-15 in which HUD took the lead
five years ago by establishing what they consider acceptable
arrangements.
I contacted 25 state regulators and questioned as to how they
test a branch to determine whether it is legal in their state. I
received responses from approximately 60 percent of the regulators.
What I learned is that many states follow HUD's lead as a method of
determining what they will permit. The states that have attacked
the issue have set rules that they feel will flush out the illegal
ones. Some states just say that net branching is not legal, while
others ignore the issue completely.
The overwhelming areas that states consider for legality seem to
be:
Control
Does the parent company oversee the operations? Do they provide a
quality control plan, and how do they direct their operations?
Employment status
Is everyone in the branch an employee of the parent company? The
branch should not have its own employees separate from the parent
company. And, of course, everyone must be a W-2 employee.
Structure
Is it truly a branch of a larger company? Many say that a branch
cannot have its own checking accounts or a P&L separate from
the parent company. Is there oversight by and accountability to the
parent company? Other important questions to ask are: Who pays the
bills, and who is responsible for the lease?
Reputation
Some companies have earned a bad reputation with lenders,
regulators and consumers. This may well be a direct result of
allowing the wrong people into their systems, while providing
little or no oversight. That doesnt say much for the potential
longevity of this type of company or your future.
Before entering into an agreement with any company, one should
call some wholesale lenders and get an opinion as to their
experience with that particular company. It is always a good idea
to check with the Better Business Bureau and call or e-mail the
state regulators to see if the prospective company has had any
issues. It would also be wise to talk with a current branch manager
of the prospective company.
Time in business
Some branching companies have been in business for more than 10
years, while others have been in business for only a few months.
Length of business is less relevant than one might think. A company
that has been doing the same thing for 10 years could be a bad
thing. Some companies started when there was no regulatory
oversight or controls over what they did, and yet they continue in
the same way even though it may not be agreeable to what HUD has
determined as "acceptable" or state compliant.
Conversely, you probably do not want to join a company that was
not in the mortgage business two years ago. Many companies want a
branch manager with a minimum of five years experience, so why not
hold a prospective company to the same standard?
Although there can be no hard and fast rule, my opinion would be
that the company or the principals should have more than 10 years
of successful experience in the mortgage industry. And, your
contact person within that company should be someone who has been
in your shoes. The key is to do your homework. Get information on
the company as well as its principals and staff in addition to
their experience level.
Compensation
The bare fact of this type of relationship is that you, the branch
manager, earn the net profits of your branch. That's likely how the
term "net branch" was coined. As I read it, HUD acknowledges that
this is an acceptable form of compensation. Most experts agree that
employees must be just thatemployees, which means being paid on a
W-2 with access to company benefits if the company offers them.
Frequency of compensation is also a consideration. How long do
they keep the branch's earnings? There should be regularly
scheduled pay periods, and they should be in the habit of meeting
these dates. You certainly don't want the corporate office using
your branch's income to float their cash flow for 45 days. You may
not want someone who pays the branch as the loans close if they do
not pay all of their employees the same way. That could be
questioned by regulators.
The burden again is on you. Check with some loan officers or
branches and see if they are paid on time. There are legitimate
reasons why someone may not get paid promptly on a loan, so make
sure you talk to enough people to get a good feel.
Compliance oversight
This is where many companies fall short. If a company doesn't have
a compliance officer or a compliance department, then who will help
keep you (and them) out of trouble? Compliance is more than just
licensing. At the very least, it should include the auditing of
files, having answers to your operational questions, and a set of
policies in place for everyone to follow. If you truly work for the
company, you must be accountable to someone.
Another major compliance concern is how you are connected to
their office. If you have a branch location from which you conduct
business, you should be licensed at that location, not just using a
corporate or any other licensed address. Branches located in one's
home should also be licensed. If your state does not permit that,
then you should go with a company that follows the state
guidelines.
If a company freely floats licenses around for usage in other
states or parks loans for a fee, this too could be an issue. Find
out what their procedures are with regard to additional licensing
if you plan on doing business across state lines.
Broker vs. lender
If being a lender on the transaction instead of a broker makes no
difference to you, then this will not be a consideration for you.
Many people, however, have real concerns about RESPA changes and
how it may affect disclosure requirements. For this reason, they
may want to be a lender.
Many loan officers feel that the ability to call yourself a
lender is important. Being a lender versus a broker often helps
with referral sources as well as borrowers in creating credibility.
Being a lender also gives the company the ability to underwrite the
loans, draw closing documents and fund the loans independently of
another lender. However, many branching companies are just brokers
or brokers with warehouse lines. If the company is a true lender,
do some rate comparisons to make sure their rates are competitive.
Having a lender status may not be of value if you cannot use
it.
The bottom line
The bottom line is just thatthe bottom line. Above all, you need to
do the math. Based on your production, sources of business,
overhead and the cost of the affiliation, you should determine if
the numbers will work for you. For some, it is better to remain a
loan officer and let someone else take the risks and absorb the
responsibilities. For others, however, this type of "shared" risk
and "shared" reward will be better than having your own brokerage.
Your ability to build a sales team and develop business is what you
bring to the table. If you cannot do that, then no program will
work for you. No matter how successful the parent company is, only
you can guarantee your success.
Mike Sweigart is a business consultant offering growth
strategies, training and compliance services to mortgage companies.
He may be reached at (866) 875-8224 or e-mail
[email protected].
