“Money won’t create success, the freedom to make it will.”
Last year was a banner year for mortgage lenders. According to ATTOM Data Solutions, more than 7.3 million loans were originated last year, representing a 2 percent increase over 2015 and the highest total since 2013. However, as lenders grow in scope and scale, the number of compensation plans their human resources and payroll departments must manage increases as well. Federal rules enacted by the Dodd-Frank Act have provided lenders with a framework for what is permissible, but there is still tremendous room for flexibility in how lenders compensate their loan originators (LOs), processors, underwriters, and other origination support staff.
Compensation also provides lenders with a competitive advantage on the hiring front, especially if industry predictions of declining volume in 2017 prove accurate. According to the May Economic Developments report from Fannie Mae’s Economic & Strategic Research Group, total mortgage originations are expected to drop 22 percent this year, as the market shifts from a refinance-driven environment to a purchase-driven one. With market share in short supply, lenders will have to become even more creative in their compensation schemes to recruit and retain top performing LOs.
As the competition to attract top LOs increases, lenders must maintain a delicate balancing act between offering competitive, and often customized, compensation plans, and maintaining compliance with federal LO compensation rules. By automating this complex process, lenders can free themselves from the burden of managing multiple compensation schemes on spreadsheets while still retaining the ability to manage compensation on a case-by-case basis.
So how complex can compensation get?
Depends on who you ask.
While some lenders have restricted their compensation schemes to a handful of simplistic plans based solely on basis points per loan closed, others have adopted a more entrepreneurial attitude towards compensation. These organizations allow regional offices and, in the case of top producing LOs, individuals to set their own compensation plans. This is where the complexity arises in the form of bonuses, tiers, referral plans, overrides, and a slew of other mechanisms that must be tracked and calculated each pay period to ensure staff are being compensated accurately and as expected.
Other lenders have sought to tie compensation to loan quality and efficiency metrics. For example, many lenders have offered higher bonuses to processors that move loans from processing to clear-to-close within shorter timeframes. This, however, requires payroll staff to keep an even sharper eye on the production pipeline to ensure accurate compensation is made.
Because LOs are covered under the Fair Labor Standards Act, lenders are required to pay a minimum wage and must adhere to labor laws regarding overtime and timekeeping. However, few lenders compensate LOs with a base salary plus straight commission.
Instead, an LO is generally guaranteed an initial base pay for the first two to four months, either as a salaried or hourly employee. While some lenders are simply writing that initial salary off as an onboarding expense, others are recouping that pay from future commissions that the LO earns, a practice more commonly known as a recoverable draw. Many lenders are also using this methodology to provide LOs a level of autonomy in making purchase decisions by recouping the cost for software subscription fees, marketing investments or, in some cases, hiring assistants or additional support staff.
As LOs are paid these draws upfront, management must recheck draw balances each pay period to determine who is carrying a draw balance and whether the LOs’ pipeline is sufficient to recover their draw balance at month’s end. This would be a difficult task on its own, but when added to the already complicated process of managing payroll for a geographically diversified workforce paid on metrics that can vary from person to person, it’s no wonder LO compensation is often characterized as “thorny.”
As is often the case in the mortgage industry, lenders have attempted to manage the complexity of compensation using the standard fallback of an Excel spreadsheet, a risky solution according to Dudley Strawn, EVP of Human Resources at Dallas-based PrimeLending.
“Mortgage compensation is complex,” Strawn says. “If you’re trying to manage your commission accounting process with spreadsheets, you’re going to make mistakes.”
PrimeLending has taken great pains to ensure it maintains compliance with all federal compensation rules. Yet, that hasn’t prevented PrimeLending from offering their LOs and other staff flexibility regarding compensation.
“There are a lot of different types of compensation plans out there, but what we try to do is focus more on structure because as long as our structure is sound, we know we’re going to be compliant. If we’re consistent in how we’re paying, then the plans can be more individual or market driven to serve our business needs,” Strawn added.
What has helped PrimeLending manage the breadth of compensation plans it maintains is automation. Prior to automating management of its compensation plans, PrimeLending’s commission team was responsible for reviewing and administrating compensation calculations and reports each pay period, often spending late nights and weekends at the office to ensure employees were being paid correctly.
Not only has automation improved the quality of life for PrimeLending’s commission team by simplifying compensation oversight, it has also provided additional benefits in the form of efficiency and transparency—two areas in which lenders are always striving to improve.
“Automating the compensation process has ensured better results for PrimeLending by enabling us to be more consistent and paying people right the first time,” Strawn explained. “It has also saved us tremendous amounts of time by giving our sales force and branch managers access to compensation information so that we don’t have to manually distribute commission reports. Now our sales force has full transparency into how they’re going to be paid at any given time. They can access our compensation system and see where they’re trending from a commission perspective virtually in real time.”
PrimeLending isn’t the only lender that has benefited from utilizing an automated platform to manage its compensation schemes. For Houston-based Envoy Mortgage, the ability to manage its various compensation plans has been crucial as the company has grown over the past few years.
With more than 1,500 employees and originators licensed in 49 states, Envoy has seen first-hand the impact of flexibility in compensation on the ability to remain competitive in the market.
“Across the country, there are different price points. You’ve got your rural areas and your metropolitan areas, and the compensation plans could be quite different for each of these areas,” said Kris Benson, Vice President of Human Resources at Envoy Mortgage. “There are also certain pockets of the country where we have to pay a higher commission in order to be competitive within that certain area, so we must have the flexibility to be competitive with other mortgage companies, but we also have to ensure that we remain in compliance.”
At Envoy, prior to automating compensation management (and pre-Dodd-Frank), branch managers were responsible for manually reporting monthly commissions to the corporate payroll/HR department, making it difficult at times to get that information in a timely manner to ensure LOs were paid accurately.
Now that Envoy has automated its compensation management, communication between branch offices and the payroll department has improved significantly, eliminating errors regarding compensation and bonuses. In addition, all Envoy employees must use the automated system to confirm their compensation plan, providing Envoy with a definitive record of the compensation paid on any given loan—a benefit Benson says is invaluable from an audit perspective.
Automation has also helped Envoy manage the differences in compensation across its retail and correspondent channels. LOs in Envoy’s correspondent division are paid commissions on volume and performance metrics, whereas, on the retail side, Envoy pays its LOs an upfront draw based on an hourly wage and recoups that draw from commissions earned. Not only does Envoy’s compensation platform help payroll staff keep track of each retail LOs draw balance, but it also provides employees access to this same information, providing full transparency into compensation.
In addition, Benson’s staff conducts an hour-long training session each month for managers and staff on Envoy’s compensation management system to ensure everyone is familiar with the compensation system and can access their comp plan information at any given time. Branch and regional managers are also trained on how to pull reports from the compensation system to complete the monthly profit-and-loss statement for their individual branch.
“We’re trying to automate everything so that there’s less chance for human error and to make my staff as productive as possible—that’s our goal,” Benson said.
Ultimately, for lenders like PrimeLending and Envoy Mortgage, automating compensation management allows these organizations to remain flexible in the face of increased competition for top talent while also staying in compliance with federal labor and compensation rules. Furthermore, eschewing the “management by spreadsheet” methodology eliminates much of the risk and headache of compensation management, enabling lenders to maintain compliant oversight of their various compensation schemes no matter how large they grow.
More money, fewer problems—that’s a sentiment a lot of lenders can get behind.