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Why LO Comp 'Pick-A-Pay' gets Picked On (Part One)

APR 21, 2014 11:37am ET
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The so-called loan officer compensation pick-a-pay-plan is often at the center of controversy regarding its illegality. I believe the reason for this is not so much the concept as its implementation. In other words, depending on how the plan is set up and utilized its compliance level will dramatically change. This will be the first in a series explaining the serious mistakes being commonly made in connection with the use of these compensation strategies.

While there are compliant ways to institute these plans, many employers make the mistake of having several "buckets" that vary by a few basis points. Essentially each loan officer has a customized plan that they can change every quarter or so. These plans are truly designed for each loan officer and can change or vary from loan officer to loan officer by a few basis points.

Obviously, such a plan has problems. If employees can move only a few basis points every few months, then clearly they are incentivized strongly to push up their profitability a few basis points to set it higher the next change cycle. Alternatively they have to maintain it as high as possible or they could be adjusted downward. Thus, the ability for incremental adjustment coupled with employer and employee discretion over relatively short periods create substantial incentive on borrower pricing at the loan officer level. Moreover, the incremental adjustments are nearly impossible to explain or justify: “Why did loan officer X have his compensation adjusted down by 3.5 basis points and subsequently adjusted up by 4 basis points over a 9 month period?” Another question: “Why did loan officer X get paid 3.7 basis points more than loan officer Y and in turn why did loan officer Y get 4.3 basis points more than loan officer Z? Such incremental changes by a loan officer and among loan officers are difficult to justify on a legitimate basis.

Again, this is only one of a series of mistakes lenders make in connection with the implementation of pick-a-pay compensation. There are many more common mistakes we will discuss in the upcoming weeks.

Comments (9)
Can youexpalin how these pricing buckets affect consumer pricing on loans. Do they interfere with fair lending?
Posted by | Monday, April 21 2014 at 12:43PM ET
@ Jim, when a Mortgage Loan Originator "MLO" makes more money (get's paid higher compensation) that means the consumer is paying more. For example if on 01/01/2014 the MLO was on a 1% Bucket and he was offering the rate of 4% to the consumer, when on 03/01/2014 he is moved to the bucket of 1.5% he is not offering a rate of 4.125% to satisfy the increase in his income. as a result the consumer is paying 0.125% higher in interest over the course of their mortgage. (We are assuming that mortgage market and rates have not changed from 01/01 to 03/01 and the MLO is offering the exact same package in points, fees and cost to the consumer)
Posted by Crestico F | Monday, April 21 2014 at 2:23PM ET
I started lending with Great EWestern Bank in 1984, and they were the originators of the pick a pay loan.
the margins back then were 2% above the cost of funds index, and the initial discounting was 1% off the fully indexed price of the loan, so the neg am was minimal, and by the third year you were on track amortizing the loan.
When the program morphed into more premium for higher margins and longer pre payment times, I knew the writing was on the wall, especially with a 1% start rate, which was 5% less than fully indexed.
I know that internally there were issues with the explanation of the product at Great Western, and without training the brokers how to sell the program, the 1% start rate was what was sold, without describing to the borrower what paying that ultra low rate meant and how it affected the principal balance.
I think it is too bad, because with the low margins it originally came out with the loan program was really pretty good for both the lender and the borrower, if properly disclosed.
The changes in pricing resulted in brokers upselling the margin and the pre payment penalty, which cost the consumer and finally cost the brokers an additional loan program.
Posted by TOBY W | Monday, April 21 2014 at 2:43PM ET
I see Houtan's point on LO comp, but disagree slightly. If the LO comp changes from 1% to 1.5% from 01/01 to 03/01, obviously, the LO is going to be quoting higher rates and fees by .5% points. However, the LO is going to be pricing every borrower the same price point. If, in the real world, every lender was priced exactly the same, I would see this as an issue. However, we all know this is not the case. If a loan officer's comp does not change, but the company decides they can add 50 basis points to their price sheets and still be competitive, where does the difference lie with the customer.
Posted by SCOTT G | Tuesday, April 22 2014 at 2:10PM ET
Houtan H. has the reply regarding MLO pay to Jim S. question, wrong in so many ways, its laughable.
Posted by jvoisard | Tuesday, April 22 2014 at 5:45PM ET
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