DEC 10, 2013 11:23am ET

Commissions to Remain Big Part of Mortgage Sales Landscape

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The commissioned loan officer is not likely to be a thing of the past in the mortgage business even as others are moving away from this model towards salaries for legal and competitive reasons.

This will be the case even as the mortgage industry sees the same trends other sales-based businesses are seeing.

For example, The Wall Street Journal had an article about a change in the auto sales business, where customers have researched what they want on line and determined what they are willing to pay.

As a result, dealerships are moving away from paying auto sales people commissions and instead have reshaped their duties into one more appropriate for a salaried position.

Furthermore, sales are typically a team effort, writes Josh Patrick in a blog posted on the Stage 2 Planning Partners website. It is more than just the sales person responsible for the sale happening.

In the mortgage industry, most loan officer assistants are compensated from the loan officer’s commission, writes compliance expert Ari Karen for his blog on this website. There are reasons, including compliance with the Real Estate Settlement Procedures Act that this practice should be abandoned, Karen says.

Then there is the 3% fee cap which is part of the qualified mortgage rule. Could that be the issue that forces many firms away from paying commission?

There are many issues which need to be part of the discussion, says sales expert Stephen Greenberg, who writes a column for Origination News.

An employee is treated for taxation purposes much different than an independent contractor; this affects those loan officers who do not do Federal Housing Administration loans only. There are also ramifications for the employer in terms of taxes to be paid, he points out.

Then there are some practical issues. Most mortgage companies don't have an experienced sales manager, so who in the organization has the ability to develop a viable salary plan for originators (incentives, bonuses, lead distribution, etc.)?

The employer will need to develop a monitoring system to ensure the productivity of their sales employees. Without a well thought-out compensation plan it will be difficult to retain and hire productive loan originators, Greenberg says.

Paying a commission allows a loan officer to make an “unlimited” amount of money. “By paying the loan originator a salary, a lot of what makes a driven sales person successful has been taken out of the equation. That being said, a truly productive sales person will most always seek to originate for an organization that will pay them handsomely predicated on production,” he says.

It is the potential for a large payday that attracts most people to the role of a loan originator. “That's also what keeps them here and what drives the top 20% who produce 80% of the business,” says Douglas Smith, who also is a columnist on sales for Origination News.

A salaried compensation structure may work best at a company which is primarily call center oriented, which gets much of its business from refinancings, says Joe Ludlow, vice president of sales of Advantage Systems. Sales on the commission calculation module which is part of the company’s Accounting for Mortgage Bankers technology increased 20% since last year.

Doing purchase loans requires more work from sales people, including sourcing them and getting the borrower ready for application when needed (especially true for first-time buyers).

A few companies have experimented with a pure salary structure, but not any of the bigger players have done so, he said.

Mortgage banking is in the middle between the salaried nature of the bank and the pure commission nature of real estate brokerages.

So a common mortgage company commission structure does involve the payment of salary and overtime to loan officers to meet federal minimum wage rules. But that salary and overtime can be offset against any commission to be paid.

And so companies are turning more and more to technology to help figure out the calculations, Ludlow says, which is one of the reasons for the increase in AMB commission calculation module sales.

Some of the experiments in paying a straight salary might be a reaction by those firms having problems to trying to figure out the commission versus the clawback, Ludlow says.

Automating the process is the more common reaction to the new complexity in calculating commissions, rather than paying just a salary. Some of the recapture programs have become very creative, he notes.

In other sales-based business, the staff gets the salary as a base, not subject to any offset and the commission is a bonus, Ludlow points out. This is not common in the mortgage industry, but it is the right way to compensate these sales people. It forces managers to recruit more carefully and train more effectively because the company is out the salary and it can’t get it back.

The current way of doing business is not as consumer-friendly, he says. But things keep evolving, with each year bringing a different compensation twist than the year before.

Sales people used to receive the “overage,” which is based on the amount the borrower paid above the posted price for a loan. But the practice is seen as discriminatory against protected classes and no longer permissible.

But companies quickly found a way around the ban, Smith says.  Some increased their compensation, while other changed the format of their rate sheets. “If the industry moves toward salaried loan officers, companies will have to find another way to pay their best producers what they are truly worth.

“I think as QM and the 3% cap becomes a reality, some lenders, mostly banks and credit unions, may elect a salaried system with some kind of company-paid quarterly or monthly bonuses based on volume that is invisible to the consumer and compliant,” he says.

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