6 Ways Mortgage Lenders Can Get Creative With Their Loan Officer Compensation Plans￼
Loan officers and originators are often the front-line salespeople for any mortgage lender. These LOs liaise with borrowers, handle applications, and generally work to close as many viable deals as possible in a given month or quarter.
LO compensation by the (legal) book
As is the case for most salespeople, LO earnings tend to be heavily commission-based.
But unlike salespeople in some other fields, mortgage LOs’ compensation is subject to certain laws and regulations in the United States, particularly Regulation Z of the federal Truth in Lending Act. The key compensation rules spelled out by Regulation Z are:
- Loan officers can’t be compensated based on the terms of the loans they close
- Loan officers can’t be compensated by multiple parties for the same loan
Additionally, LOs are expected to be “qualified” under relevant federal and/or state laws, which generally means an LO should have licenses and/or registrations, similar to other mandatory professional certifications. Mortgage LOs must typically pass the National Mortgage Licensing System and Registry’s (NMLS) national exam, which also requires 20 hours of relevant education upfront.
There are some exceptions, but in these cases, employers of LOs must still vet their officers along guidelines set out by the Secure and Fair Enforcement for Mortgage Licensing Act (or the SAFE Act), including criminal background and credit checks, and must also provide training consistent with the loan officers’ origination activities.
These regulations still offer plenty of flexibility in determining LOs compensation. While you can’t adjust commission rates to incentivize your LOs to close on more high-interest or subprime loans, you can offer higher commission rates on loans originating from preferential lead sources.
Let’s look at a few ways you can structure your LOs’ compensation plans to incentivize high-performers and reward LOs who land the deals you want most, while still staying safely within regulatory boundaries…
1. Adjust commissions by the source of their loans
There’s no regulatory issue with providing different levels of compensation based on where (or who) your LOs source their loans from.
For example, you can set higher commission rates for self-sourced loans – which your LOs find and close entirely on their own – than on loans closed from pre-qualified leads. You could incentivize your LOs with a 35% commission rate on self-sourced loans on leads that have never entered your CRM before, while paying 25% commission on loans closed from leads generated from your website or direct-mail marketing activities.
Using commission tiers in this way can encourage your LOs to do more prospecting and outreach on their own, rather than waiting for marketing-qualified leads to hit their inboxes before calling and emailing their assigned prospects.
2. Adjust pay based on total loan volumes
Tiered commission structures are common throughout the sales profession, and they’re perfectly hunky-dory within the law as well.
Paying higher commission rates and/or bonuses for higher-volume closers just makes sense when you’re trying to reward your LOs based on their performance. If Johnny A closes $10 million in total loan volume one month, you might pay him out at a 30% commission for that month, while Betty B might only merit a 25% commission on $3.5 million in loans.
The rates and tiers you offer your LOs will, of course, look different based on your costs and profit margins (among other factors), but pegging payouts to periodic loan volumes can be a fairly easy and effective way to reward your best LOs, while giving new or less-engaged reps a target to strive for.
3. Offer bonuses for loan volume and/or quantity
Bonuses are another common incentive for sales performance, and they don’t need to be cash-based to qualify. Reaching certain monthly, quarterly, or annual volumes could earn your best LOs an all-expense-paid trip to Ibiza or (just imagine this in being said by the Price is Right announcer) a new car!
For accounting purposes, and in case your LOs can’t make use of the chosen prize(s), you should also offer a cash-equivalent reward as a backup option. Pricing your prizes precisely (try saying that five times fast) not only makes life easier for your accounting and compliance departments, it also ensures success can be rewarded on its own terms, rather than being restricted to whatever you’ve chosen for prizes.
4. Include front-end and/or back-end fees
Many loans, mortgage or otherwise, include certain front-end or back-end fees. These fees can easily be arranged to serve as payment for your LOs.
A typical payment of front-end compensation might involve a flat $995 fee for every loan your LOs complete, which can be paid up front out of loan proceeds (or from the borrower’s down payment). Back-end compensation can be more complex, as these payments are generally stretched out over longer periods, but complexity can be tricky – it’s easy to start structuring back-end compensation to pay out based on the terms of each loan, which as we’ve covered earlier, is one of the few explicit prohibitions in Reg Z.
The simplest way to pay your LOs on a fee-based structure is simply to pledge a certain amount for every mortgage, regardless of its interest rate, duration, or size. You can still pay commissions on top of these one-time fees, so long as they’re anchored in the total loan amount, and not in any of its particular terms.
5. Divide commissions or bonuses among a team of LOs
Let’s face it, mortgages can take a lot of work. Today’s lenders sometimes divide the support and servicing responsibilities for their mortgages among small teams, or might otherwise split each loan’s commission payment among their entire LO team.
Anyone who’s felt like they’ve carried a group project in school (or at work) can tell you divided rewards don’t always feel fair. Split commissions may frustrate your top performers and allow weaker LOs to coast on the efforts of their more eager teammates, especially if they’re not split in a way reflecting the effort expended to close each loan. It’s also worth noting that “pooled” compensation is generally not acceptable under Reg Z, so you can’t simply divide all commission payouts across your entire LO team.
One way to avoid resentment and imbalanced output might be to offer appropriate “overrides” or additional bonuses to branch or team managers atop their regular pay, incentivizing them to create an optimally productive team of LOs under their leadership. Bonuses can also be paid out to everyone on the team for hitting certain team-based milestones. There are plenty of creative ways to incentivize your entire team without creating feelings of resentment or lopsided effort.
A manager or team leader should receive no more than 10% of their annual income in the form of overrides or team-based bonuses.
6. Offer fractional ownership (shares) in the mortgage business
Another compensation trend gaining traction among non-bank lending firms is fractional ownership – LOs are essentially being offered a stake in the company they’ll be closing loans for, with the expectation that they’ll also receive regular dividends or profit-sharing payments based on those stakes.
There’s a key difference between offering fractional ownership upfront and packaging stock awards or grants as part of a LO’s bonus earnings. A LO who owns 2% of a company that earns $1 million in net income in one fiscal year won’t need to count the $20,000 profit-sharing or dividend payout as part of their 10% override “bucket” of income we mentioned in idea 5 above. However, any stock awards or equity interest given after employment starts, whether as bonuses, commission income, or another flavor of performance-based compensation will count as part of that 10% override bucket – you’ll have to ensure your LOs don’t receive more than 10% of their total annual income as stock options or other grants of partial business ownership.
Are you using any of these ideas in your LO compensation plans? Have you come up with any innovative and rewarding ways to properly compensate your hard-working loan originators? Let us know, and we’ll gladly add your ideas to our list, with credit where credit’s due.
One way to reward your LOs without running afoul of Reg Z or creating imbalanced comp structures is simply to furnish them with the best and most efficient mortgage origination technology, like Floify. If you’re not already a user, check us out by signing up for a free trial and personalized walkthrough today: