The Great Loan Officer Migration Part II


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. 

 
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7 thoughts on “The Great Loan Officer Migration Part II

  1. Nicely said Mark! I echo your sentiments. I heard of a story yesterday of a loan that a loan officer had where the borrower had multiple businesses, K-1’s, LLC and partnerships. I realized that with the new pay plan these borrowers will not be served as readily as other, more simple transactions. Since the government wishes to keep the compensation the same for virtually ALL types of loans, the difficult loans will not get done. In the past a loan officer could make a pricing judgement on the fly and simply charge additional for the added time and expense of handling a difficult transaction. No more!
    I tell you this, you will not see 203k loans get done any longer either. They are a painful 3 to 4 month process. With the compensation scenario in which all deals are paid the same, loan officers will simply choose not to do those difficult type loans.
    Good luck feds. You’re gonna need it!

    1. As is the case with all legislation, the outcome will be far different than what those that wrote the policies thought. Big banks are going to pay Loan Officers less and guess what? They aren’t going to pass along the savings to the consumer – they are just going to make a larger profit. To think that the consumer will get better rates and/or fees is naiive at best.

      1. I disagree to an extent. Banks need to feed their machines so they will pass some savings off just to try to keep volume up in a ascending interest rate environment with less LOs.

      2. The jury certainly isn’t out at this point. Banks have traditionally had a real love/hate relationship with mortgages so it will be interesting to see what happens in the short/long run. They have been fickle to say the least. Unless they start seeing the correlation between the talent they will lose and the compensation that they give I do think we are going to see them lose some good people. Time will tell in any case. Thanks for writing.

  2. Do you know if banks have to have a MSA built into the rates based on the new law or is that up the individual companies themselves? Loved your article.

    1. Thanks very much Mandy. From what I can see each individual company is handling the new regulations in a different way. I hope you’ll pardon my ignorance but I’m not familiar with the MSA term. Can you enlighten me? Does it have to do with the compensation the originator is receiving? Thanks again for the nice comment.

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