One of the biggest compliance and litigation risks for lenders involves the performance of branch managers. Indeed, there exists an inherent conflict between branch managers—especially those compensated through profit or volume—and their employers. Such branch managers are often incentivized to maximize profit or volume, leading to overly aggressive policies, procedures, and actions on the branch level.
To mitigate the risks of overly aggressive branch managers, lenders should consider several control initiatives. First, simply visiting the branch on a regular basis sends a clear message that the home office is not absent.
Additionally, there should be bonuses where eligibility is based upon specific compliance metrics. These metrics could include the absence of repurchases, negative regulatory audit findings, consumer complaints, and/or substantiated violations of corporate policies and procedures. Moreover, affirmative compliance aspirations such as positive quality control results, customer reviews, loan officer testing scores, approved underwriting submission rates, etc., can also be utilized.
Yet another tool to incentivize compliant practices involves the use of a branch reserve funded by branch operations. This reserve may be dedicated as a severance for the branch manager upon termination, susceptible to reduction as a result of compliance deficiencies or other contingent liabilities.
Finally, annual performance and salary reviews should include a compliance component. The bottom line is that branch managers should have a financial incentive to consider compliance factors and be consistently reminded of compliance matters in connection with their job performance.