Louise Bright: The Importance of Having Different LO Compensation Models


PERSON OF THE WEEK: Mortgage loan originator compensation has become an increasingly complex part of the business due to regulation. As a result, more mortgage lenders today are relying on software to automate LO compensation, making the process faster and more efficient.

One advantage of automating LO comp via software is that it can enable lenders to change their compensation models quickly in response to new regulations or even changing market conditions – such as the impact of a pandemic. To learn more, MortgageOrb recently interviewed Louise Bright, commission implementation and support specialist at Advantage Systems, a provider of mortgage accounting software.

Q: How have compensation models for LOs changed over the last decade? 

Bright: Since the mortgage market crisis of 2008, there have been numerous changes to how the industry operates, including legislation such as Dodd Frank, the Truth in Lending Act (Regulation Z) and other LO compensation rules. These regulations had a significant impact on the way lenders compensate their LOs, protecting the borrower from unfair lending practices while also continuing to incentivize their employees – all of which help lenders and brokers attract and retain the top talent in the industry. 

As lenders learned to deal with these new rules and regulations, they brought in new technology to help lower costs and increase profits. With changes to compensation models, commission calculations have become increasingly complex. So, lenders rely on access to modern tools that can help them quickly calculate commissions on each loan for not only the current month, but also to recalculate commissions swiftly and accurately on prior months as well – especially when required by an audit.

In the past, commissions were based on the P&L of the loan, but now it’s a more straight forward process – LOs are paid specifically based on the basis points (BPS) of the loan. While LO compensation models can vary from lender to lender – some are paid a base salary, others are paid a base salary plus commission – most are typically paid commission. To explain further, for the commission of 100 BPS on a on a $400,000 mortgage, a LO  would receive an $4,000 commission. 

So, for a lender with several LOs (all of which are closing anywhere between 20 to 40 loans per year), having modern, industry-specific financial accounting and commission management technology is increasingly critical to managing and measuring the success of their LOs, their branches and their overall success.

Q: How can the industry expect compensation models to change moving forward, especially with the changes brought onto the industry due to the pandemic?

Bright: It’s no secret that the pandemic directly impacted The Fed’s decision to push rates to historically low levels, which sparked a significant increase in refinance volume. This increase caused lenders to shift their focus from traditional purchase loan origination to refinancing activity. 

For LOs, the increase in volume meant an increase in their  total commissions. In fact, research proved that the second quarter of 2020 resulted in a 59 percent increase in total LO commissions (when compared to the second quarter of 2019). Loan volume continued to rise throughout the rest of the year as well, which meant the accounting departments at mortgage companies were busier than usual – even while half of their teams were working from home. 

Louise Bright: The Importance of Having Different LO Compensation Models
Louise Bright

With the shift in activity, lenders also shifted their compensation plans. As the U.S. eases on the lockdowns and things start to get back to normal, there will likely be another shift in activity, both in LOs’ primary focus as well as the compensation plans that lenders put into place. Moving forward, lenders will see the importance of having different compensation models for varying market environments.

Q: Loan origination costs have doubled in the past decade and industry costs are reported to be largely personnel-related, according to Ellie Mae. Why is it more important than ever before to invest in accounting and commissions technology to help lenders achieve success in today’s competitive environment?

Bright: Lenders often focus on the profits of each loan (how much the loan is sold for and how much they are making off the loan) because at the end of the day, bigger loan profit margins are critical to the success of their branches. Commissions are directly tied to that profit because they take away from the profit of the loan. Often, the commission on a loan is the biggest single expense on a loan. Commission calculation software should be considered a critical piece of the profitability puzzle. So, the need for an enhanced accounting and financial management technology is no longer be “nice to have.” Access to tools, specifically designed for the mortgage industry, has become a “must have.” 

In past years, the only person paid commission on a loan was the LO (and occasionally the branch manager), but now there can be up to six or more people who are paid on the loan – the LO, the LO assistant, processor, underwriter, mangers and more. With so many people being paid on each loan, lenders need the right tools to quickly and easily calculate commissions, overrides, commission adjustments, bonuses and more to accurately pay their employees.

It’s critical for lenders to direct more resources toward commissions management – as commission software is critical to reducing manual labor required by the accounting department. Good software allows users to calculate and report commissions overrides, commission adjustments, bonuses and more. Not to mention, having real-time access to these tools can be a critical component because reporting on the loan level provides a clear picture of exactly how much money a lender is making or not making at the end of the day.

From a reporting standpoint, modern accounting and financial management tools allow branch managers to measure productivity and drill down and through the data, to see line-by-line the details on each loan. It also allows regional managers to compare branch activity to measure performance and see where the profits and expenditures are.

Q: How does accounting and commission calculations technology impact lenders’ ability to attract and retain talented LOs?

Bright: With experienced mortgage personnel in short supply, commission calculation software that is flexible, cost-effective and can pay numerous people a commission, bonus or override relative to a single loan, can help firms retain and recruit the talent necessary to take advantage of 2021’s strong home lending market. With  bespoke compensation helping attract and retain the industry’s scarcest resource, lenders are driven to rely on technology to really engage and keep talented LOs at their branches. At the end of the day, there’s a dual motivation: LOs want to make money and lenders want to keep the top talent. But what does that have to do with technology?  

Well, with  tools that can measure LO productivity by seeing exactly what their LOs are making on their loans, compared to the volume of loans produced,  managers are able to more compensate their top-tier officers accordingly. If the branch is performing, managers have more incentives to pay more their LOs. Plus, with modern  technology and the and the right software, lenders can see which types of loans are performing well at each branch and shift their focus more to that type of loan or product – using compensation to incentivize those type of loans.

For example, with the help of technology, managers are able to sift through the data to review which LOs are performing better for certain loan products, such as wholesale or self-generated loans. Then, they can adjust their compensation models accordingly – and better compensation models as well as earning bigger commissions and bonuses are huge motivating factors for LOs to stick around and continue performing for the branch. 

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