#ThursdaysThoughts – Broker Compensation de-mythed! Debugged! What ever you want to say, I’m not a lawyer, but I am a great AE (Lender Rep). And I know what’s my opinion of a right compensation plan a Broker should have in place. This all came about in a thread on social media where one Broker asked if they could have multiple comp plans with different lenders. The real true answer is —- It depends on how you pay the Loan Originators and how your shop is set up.
I talk about every aspect the comp law rule does and break it down. Can you pay someone 1099 or do you have to W2? Can you lower your compensation during a loan? Can a Broker owner have multiple comp plans with different lenders? These are all viable questions for the small business owners of Mortgage Business Brokerages. Some answers are vague, and some answers are crystal clear in reading the final compensation law from 2013. (updated version is uploaded into Sales Talk with Mortgage Pro’s file’s tab) WARNING – This video is exactly 30 minutes, and one of the longest I’ve published. But I think it’s a great interpretation of how comp law needs to be implemented for you Mortgage Brokers out there. If you have questions let me know.
There’s a definite difference between how a Broker with LO’s they sponsor and a “One man Band” Broker shop would need to make sure they have their comp plans set up. The NUMBER 1 thing to ALWAYS think about is the definition of a PROXY! – Does the compensation to a loan officer vary in an audit of a bunch of a loans, and can the LO directly or indirectly influence the factors to charge more or less on any one loan. If the answer is yes, then you should do something about the way you have your comp set up.
So in other words, if a LO sponsored at a Broker shop has the ability to choose a lender and get paid a different amount, and you as a Broker charge a per file basis for example, your comp plan is set up wrong. They indirectly are being paid different percentages with different Lenders. If you have different comp plans with different lenders, but an internal comp plan to pay the LO the same amount regardless of where the loan is sent, then you are in compliance. So it all has to do with how you actually “pay the LO”. You are included in that definition Brokers. So if you’re a one man band, you can’t have various comp plans to be paid various amounts, unless so carefully constructed to pay the LO, indifferently based on another factor. That unless part is left ambiguous. But in a real example, can you have LO’s that specialize in reverse loans and that’s all they do, and they are paid X, while the LO’s that do forwards are paid Y. Well that’s a way it does look like it would work.
Remember this is my interpretation, and I’m not a lawyer. Nor does this apply to any lender that has a “line of credit” and are funding in their name. More scrutiny would need to be taken into consideration, especially if you have a direct “ticket” to sell to Fannie, Freddie and Ginnie. As well as any specific “State” rules. This is just a helpful interpretation for the mortgage Broker community of the lending comp law. Do your own due diligence, and read it. I’ve read it a dozen times in a week, just for this segment. And I don’t think it’s off by much, if any. Please construct your compensation plans to pay LO’s (including yourself) the same across the board when in the “third party origination” (TPO) space. *Remember PROXY rule.
Section 1026.36(d)(1)(ii) states that the amount of credit extended is not deemed to be a transaction term or condition, provided that compensation received by or paid to a loan originator, directly or indirectly, is based on a fixed percentage of the amount of credit extended; the provision also states that such compensation may be subject to a minimum or maximum dollar amount. The rule also further clarifies the definition of a proxy to focus on whether: (1) The factor consistently varies with a transaction term over a significant number of transactions; and (2) the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction.
Last but not least, how I would do it. If I was a Broker, I’d have a set of lenders and different comp plans for different specialties. That way I can be competitive in all products in my area. I would have a comp plan that would give incentive to LO’s to self generate a loan, and pay them more on those, versus leads I provide them. I would have a Senior level pay plan and would give a bonus incentive to my LO’s based on volume over a quarterly period. I would pay each LO a set percentage of the credit extended and that percentage would always be less than my compensation with any one lender in my roster. The spread is for the house, and how I would be able to give bonuses for volume. I would prohibit borrower paid loans to vary less than 2% of the said comp plan for that originator. So they can’t “lower their comp” by a significant amount, but enough to defray unforeseen circumstances that happen with loans to “do the right thing” for Clients. I personally would pay myself according to the set percentage comp plan as well. As to avoid being paid various amounts this way based on the lender’s comp plan.
If you would like further help in custom tailoring a comp plan that can fit for your organization, I am open to discussing these things with my Broker’s. As my goal is to help you grow your mortgage company, close loans with my team, and help you source new business with marketing campaigns. #LetsDoBusiness