It’s been almost three years ago that the Home Valuation Code of Conduct was put into effect. Since that time I can’t even count how many times I have been contacted by Realtors expressing frustration at the level of incompetence of appraisers being hired by Banks. I have to admit that things have improved since the initial weeks and months of implementation; however, overall, HVCC has been a disaster.
Here we are three years later and the same thing is about to happen to Loan Officers. In April of 2011 Loan Officer compensation plans will be drastically altered as mandated by the Federal Reserve. This new regulation will make it illegal for a Loan Officer to receive compensation based on interest rate and will also forbid Loan Officers from steering consumers into loan products that are not in the consumer’s best interest.
Sounds simple and logical but what does it really mean and what effect will it have? Here are my opinions and observations:
First, it’s important to realize that there are two types of Loan Officers in the marketplace: those that can generate their own business by referrals and those that have a difficult time doing so. The Loan Officers that can generate their own business will look for opportunities to be compensated for their ability to successfully bring customers to a company. Loan Officers that don’t often generate their own business will either exit the business entirely or in some cases attempt to work for a Bank that has an opportunity to supply them with Bank customers.
Banks understand market forces and realize that Loan Officers who rely upon them for their source of business are expendable. Banks therefore offer less competitive compensation plans, particularly in this new environment. As a result, most of the better, self-sustaining Loan Officers that work for Banks will either exit the business altogether or look for an opportunity with an independent mortgage company in which they can have the potential to earn more money. It’s all about market forces.
So now what?
In my estimation the overall quality of Loan Officer that Banks will be able to attract and retain will suffer. Remember the really good appraisers that really knew the neighborhoods, had a ton of experience and were in tune with what was happening with the market? They’re still out there but most are not willing to work for Bank owned appraisal management companies that slash their pay by up to 50%. If they are lucky, they are working on locally managed appraisal panels where they are compensated for their experience and time.
My advice is to encourage your Loan Officers that are really talented and skilled to review their options. Independent mortgage companies do one thing and one thing only – mortgages. Unlike Banks, the only way independent firms achieve customers is through the marketing efforts and relationships of professional Loan Officers themselves. The simple math is that self-generated business comes at a premium, and the premium comes in the form of compensation.
I know that not all situations will be the same but I do feel very strongly that the most talented and capable Loan Officers are going to go to where they are compensated fairly. And, in most cases, that’s not going to be the Banks.