The mortgage originations business has seen a number of different business models, including traditional storefronts and online call centers as well as all sorts of iterations of net branches and cooperatives. Now, one originator believes the industry is ripe for a franchise model, similar to what is seen with real estate brokers and even McDonald’s.
LenderCity is a mortgage broker based in Chesterfield, Mo., founded by Gregg Harris. Now Harris is taking the name and concept and offering it to other mortgage brokers. He has used the name on and off for his own business for 10 years, but back in 2006 he trademarked the name and 18 months ago started the ball on the franchise concept rolling.
There were two reasons for the franchise concept: the first is the compensation rule and the squeeze on the mortgage broker business. He thought of ways to band brokers together. The first idea was to form a co-op, but franchising made more sense to him to create a network of brokers to work together. The second reason was simple: to help grow LenderCity as a brand.
Under his franchise concept, each office is independently owned and operated. They maintain autonomy and control their own business, but LenderCity gives those branches the backing of a national brand plus such things as back office, marketing and lead generation functions.
Net branching, in all of its various forms and names, requires the branch manager to use the corporate parent’s license and checkbook. Because of Federal Housing Administration rules, as well as the regulations in some states, the branch manager must be an employee of the parent company.
Franchise allows the operator “to get into business for yourself and be a broker,” Harris said. The branch manager does not have an ownership interest in LenderCity, nor does LenderCity own the office or employ the branch manager.
The franchisee will pay an initial franchise fee for the rights to the LenderCity and for its systems, he said. After that, franchisees pay an ongoing royalty for support and ongoing training. Plus there will be national and regional marketing funds to support advertising and marketing efforts.
Like with Coldwell Banker or Century 21 (or McDonald’s or Subways for that matter, he said), the franchisee gets the help they need to succeed in business.
On the regulatory/legal side of things, Harris is working with a franchise attorney and franchise consultants who have looked into the matter, as in talking over the concept with people someone did express the concern that such a structure could violate the Real Estate Settlement Procedures Act.
But, he said, because of the way the franchise concept works, the operator, whether it is a new or an existing company that affiliates with LenderCity, goes through the registration that is required to be a licensed mortgage originator in their state.
Harris pointed out he does not see, at least for now because of all the turmoil around mortgages, any person currently outside of the mortgage business looking to become a franchisee.
So for right now, growth will come from within the industry, but maybe down the road people from outside the mortgage community could take an interest.
The legal structure will be as a “d/b/a,” shorthand for a company “doing business as” a certain name, in this case LenderCity. This structure is common in franchising.
Because it is not an employer/employee relationship, all of the compensation restrictions under the Federal Reserve rule do not come into play, Harris said.
There are tight geographic restrictions on each franchise (approximately a radius of two miles), he said, so there could be two or more LenderCity franchisees operating in the same city. Furthermore, leads provided to the franchisee will not be exclusive based on geographic territory. In fact, franchisees will be expected to generate their own share of business as well.
LenderCity itself has over 30 relationships established with investors plus franchisees can also establish relationships with investors, with the endorsement of the parent. But one of the main purposes of LenderCity, similar to the coops, is to provide collective bargaining power with the secondary market, he said. Obviously, the concept has to gain some traction with originators for this to happen.
This type of collective bargaining power applies to ancillary service providers such as appraisal and credit.
Harris said first and foremost he is a mortgage broker and the business will survive. “I really, truly believe the broker business will bounce back. I don’t think we are going to see it continue to die,” he declared.