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.
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:
Does the parent company oversee the operations? Do they provide a quality control plan, and how do they direct their operations?
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.
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?
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.
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.
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]