If you’ve read the blog, you know I am a big advocate of Credit Unions hiring full-time, professional originators. They are needed to develop relationships with Realtors and drive volume to Credit Unions. It’s crucial as we look to capture that elusive 3% more of the market to reach a 10% market share goal. So what does the way you pay your mortgage originators say about your efforts to be memberlicious?
If you believe that incentives and commissions drive behavior, your pay practices for mortgage originators must not only be competitive in the market, but they must match your Credit Union’s values.
Generally, I’ve seen three approaches on how mortgage loan originators are paid.
1. Pay a reasonable pay salary. This is great for the Credit Union and is fair to the borrower. It fixes the salary related costs of mortgage lending regardless of volume. But is it sufficient to attract mortgage talent? I would argue that it does not. Mortgage originators are often sales people and the best sales people often have some level of motivation associated with money. Under this pay plan, as they produce more loan volume, they still earn the same money. The Credit Union wins because of more loans and members win because more get low-cost financing for their home, but the loan originator actually loses. Paying all originators basically the same creates no incentive for helping more members and will only attract and keep average loan originators.
2. Pay a commission based on loan volume. This is the most common approach in the mortgage industry. Usually, there are payout tiers. If a loan officer closes up to a $1 million in a month, they earn a certain basis point level. Once they cross that threshold, the basis points go up. The more loan volume in terms of dollars an originator produces, the more they earn. A $250,000 loan is worth more to them than a $100,000 mortgage. To get to the higher basis point level, they can close four $250,000 or ten $100,000 loans. Which one is easier to get to? What are you incentivizing? You are pushing your originators to seek out bigger loans. And does that stay true to Credit Unions mission of helping members of modest means?
3. Pay a commission based on the number of loans. This seems to be a growing way to pay Credit Union originators and I suggest that it’s the best for any cooperative. This is similar to the one above, but the tiers are based on the number of loans closed not the dollar amount. For example, an originator might get a certain level of basis points on the first eight loans and then a higher level on the next eight loans, and so on. An originator still gets paid on the dollar amount of the loans closed because that’s what drives the Credit Union’s revenue, but they move to higher payout levels based on the number of loans. This drives originators to help more members with home ownership rather than driving them to get big loans. An originator who closes ten $100,000 loans will earn more than an originator that closes four $250,000 loans because the pay practice stays constant with a Credit Union’s mission of helping people. And that is certainly the most memberlicious of the three methods.
There can lots of variations to these plans, especially the variable rate ones. In the “old days” some lenders would pay differently per loan product. This might encourage an originator to put the borrower in a product that was best for them and the Credit Union and not the best for the borrower. That’s been outlawed by new regulatory requirements around loan officer compensation.
Still permissible, but nearly as onerous, is the practice of paying more based on a loan transaction. I’ve seen pay structures where an originator earns one level of commission for purchase loans and another for refinances. Does the Credit Union earn more money on a purchase than a refinance? Last time, I checked the answer was no. So what you get is loan originators possibly paying more attention to purchase loans than refinances. In some markets this might be okay and growing purchase money loans is crucial to long term success in mortgage lending. But in busy times, if an originator can earn two or three times as much on a purchase as a refinance, where will they focus their efforts? Do you send a message to members that come to you for a refinance that they are less important than those that come to you for a purchase?
And one final point. As I talk to Credit Unions I sometimes hear that there is a concern that a high producing mortgage originator with a solid variable pay plan can actually earn more than their manager, the VP of Lending or even the CEO. My response…..So What? If you’ve got a top talent mortgage originator that is helping lots of members with home loans and producing significant revenue for the Credit Union, isn’t that what being a member owned cooperative is all about or does the cooperative charter say something about the CEO being the top paid employee? If you are worried that your best originators will make more than you, it’s unlikely you’ll ever have strong producers (they’ll leave for better opportunities).
So the way you pay certainly will say whether you want to be memberlicious or not.