Mortgage Broker Tries Franchising as Antidote for New Regs
What McDonald's did for restaurateurs, LenderCity wants to do for mortgage originators.
The loan brokerage's founder and chief executive, Gregg Harris, is trying to bring the franchise model to home finance at a time when the industry is decidedly in flux. His pitch to prospective franchisees: buy a ready-made business that leverages his technology platform, back-end operations, marketing resources, brand identity and lender relationships.
In return, he would collect franchising fees and royalties and expand his business without having to obtain licenses in additional states.
By all accounts, it's a novel idea, and one that has its merits, observers say.
"I am actually surprised we haven't seen more of it in financial services," said Brady Walen, director of marketing at Market Insights, a financial services consulting firm. "I realize there are regulations and charter issues and all the rest but I think it's time for different business models to be explored within the financial services industry."
Harris seeks to capitalize on the displacement in the broker market, as well as counter some of the new regulations. The mortgage brokerage field has shrunk dramatically since the meltdown.
Those brokers who are left must contend with a bevy of new rules, not least of all the need to obtain numerous licenses, which can be a costly and time consuming undertaking.
"The mortgage market just continues to be very, very stressed," said Ali Raza, executive vice president of Speer and Associates Inc., a financial services consulting firm. "But if that is the case and if other lenders are not really stepping up then potentially there's an advantage and the whole notion of leveraging the internet and digital marketing those are things that are good and have some traction moving forward."
The problem is that the mortgage business is moribund right now. "I've not seen the franchise model directly applied to mortgage brokerage before," said Michael Youngblood, founder and principal of Five Bridges Advisors LLC. But "it strikes me as a singularly inopportune moment to begin this because the great majority of mortgage loans originated in this country are sold either to Fannie Mae or Freddie Mac or they are endorsed by FHA and either sold to an aggregator, for example Wells Fargo, or pulled into a Ginnie Mae and sold into the MBS market. So it would seem to me that given the high degree of standardization of GSE loans and mandated further standardizations forthcoming … it does not seem to me that the franchise model today offers a great deal of value."
Harris, who has a background in the restaurant business, says the feedback he's received so far has been all positive.
"People love the idea, love the concept. It's fresh. It's new," he said. "We definitely have a model that works. We're very successful. We do a high volume."
He acknowledged that there are some hurdles. Though Harris has been in the mortgage business for more than 14 years, the company has only been operating under the LenderCity brand for about a year and a half.
"It's a name that's not really well known," Harris acknowledged. Previously, the company was known as Fidelity Mortgage Group. Opearting out of just one office in St. Louis, the brokerage is licensed in four states: Missouri, Kansas, Colorado and Wisconsin.
In each of the last two years, the brokerage has closed an average of $100 million of loans. It arranges loans for home purchases and refinancings.
Harris just recently got all the legal approvals to begin franchising the business. He is still working out the details of the pricing structure, but essentially, he will require franchisees to pay an upfront fee, in addition to regular royalties on commissions they make.
Each franchisee will be required to get her own state licenses and lender approvals. However, LenderCity will recommend franchisees to the lenders it works with, Harris said.
Part of the reason why the franchise model has rarely been tried in financial services, Raza said, is because of the danger to a brand if some franchisees behave badly.
"There's risk dimensions in there," he said. "I think financial services in general, there's compliance issues, there's the whole 'know your customer' issues. There may be regulatory issues at play as well."
Harris is adamant that he has the proper guidelines in place to diminish some of the risks.
"We've got standards … they have to follow … but as far as the business, the neat thing about it is they are independently owned and operated and licensed under their own corporation," Harris said.
"There's a vetting process. You want good franchisees and you want people to bring good business," he said. "But at the same time for me, from a corporate standpoint, there's not a lot of risk because they're their own corporation."
Harris isn't the only one looking for an alternative way to expand his business by joining forces with other brokers. Richard Booth, a mortgage originator in Ocean, N.J., said he was approached just two weeks ago by a group of loan producers who were thinking of starting a cooperative of sorts and asked him if he would be interested in folding his operation into their organization.
While ideas such as this and the franchise model are intriguing to Booth, he isn't interested.
"In certain cases it may work," he said. "There's a lot of talent that is sort of sitting on the sidelines, a lot of people that are not happy with the banks. … I'm of the mentality, and a lot of guys in my shop, we've been through the jungle in the last three years and we're just getting to the other side. So folding our operation or becoming a net branch or a franchise is not the space we want to be in.
"It's definitely an interesting time and I think there's so much going on right now with mortgage lending," Booth added. "There's a lot of not happy people in retail because the commission structure got vaporized. … It could be a very good time to test different things out and see what takes off and what doesn't take off. I think with the right platform and the right leadership it could be very successful."