Competition for high-producing loan officers is heating up as mortgage lenders shift their attention from refinancings to home purchases.
But amid the frenzy, some mortgage lenders are questioning the tactics some rivals are using to attract top loan officers.
The more aggressive nonbank lenders, they argue, are winning the talent war by essentially allowing loan officers to set their own rate of pay. While these so-called "pick-a-pay" compensation plans are not illegal, critics say they can encourage loan officers to steer consumers into more expensive loans in order to increase their own pay.
It's become such a contentious issue that the Consumer Financial Protection Bureau has vowed to look more closely at the structure of loan officer compensation plans in upcoming examinations.
Rick Roque, the managing director of retail originations at MiMutual, a unit of Michigan Mutual Mortgage in Southfield, Mich., welcomes the scrutiny. He's frustrated that his firm is losing top talent to rivals that are paying more aggressively, but his bigger worry is that competitors are jacking up rates to cover the cost of higher compensation, and that's bad for consumers and the industry's reputation.
"Pick-a-pay is alive and well and it's hard to compete against," said Roque. "This is a very big problem for the industry."
Pick-a-pay compensation plans allow loan officers to essentially pick the amount they want to be paid for each loan. So one loan officer might choose to be paid 150 basis points per loan based on the loan amount and another may choose 250 basis points. The plans also can be structured by a pay range, with different loan officers falling into different tiers or buckets.
The problem, some mortgage bankers say, is that borrowers are essentially being offered different interest rates and pricing based on the loan officer's compensation. Where it could turn illegal is if borrowers are being steered into higher-cost loans.
(The plans should not be confused with the now-illegal "pick a payment" mortgages championed before the housing bubble by Wachovia and Golden West. Those loans turned out to be disastrous for borrowers who typically picked among four risky payment options including interest-only and amortizing payments.)
Lawyers say the legality of pick-a-pay plans depends entirely on how they are structured.
"If it's done conservatively and carefully then these programs are not per se illegal," said Don Lampe, a partner at the law firm Morrison & Foerster LLP. "[Mortgage bankers] have to be careful of steering [the borrower] and fair-lending risk, and they should not put the loan officer in a position where they can change [their pay] every month."
Ari Karen, a principal at the law firm Offit Kurman, agreed that consistency is important and he advises clients not to change their plans frequently.
"The plans have a bad name from people who abuse them and [mortgage lenders] who are conservative think they pose a threat," Karen said. "There are differences in the legal community of where [the plans] draw the line, and it creates uncertainty and controversy."
Loan-officer compensation is itself controversial. Nearly every postmortem of the financial crisis has cited the mortgage industry's past practice of allowing commissioned loan officers and mortgage brokers to steer borrowers into higher-priced loans even if the customer would have qualified for a conventional lower-cost mortgage.
The CFPB issued regulations in January 2013 and is in charge of enforcing Regulation Z, which prohibits loan officers from being compensated based on a loan's terms. But the CFPB's rules do permit certain methods of compensating loan originators using bonuses, retirement plans and other plans based on mortgage-related profits.
"The trouble with the LO comp rule is it tells you a lot about what you can't do but not what you can do," Lampe said. "And therefore it winds up in practice being a relatively squishy compliance topic."
The CFPB declined to comment for this article, but in statements at a mortgage lending conference in Costa Mesa, Calif., earlier this month, a top CFPB official said he is aware of potential abuses in loan officer competition.
"We're going to spend a very long time evaluating compensation schemes at every exam at every entity," said Calvin Hagins, the CFPB's deputy assistant director for originations.
Competition has intensified in recent months in anticipation of a rise in interest rates. A rate hike would likely slow the pace of refinancing, so some mortgage firms are paying up to attract proven loan officers who can generate purchase volume.
Most loan officers employed by nonbank mortgage firms are paid anywhere from 50 to 300 basis points on each loan based on the borrower's total loan amount, and most pay varies by region. By contrast, loan officers that work for banks can be salaried or are paid less than smaller nonbank mortgage lenders. The type of loan officer compensation plan that a bank or mortgage bank uses depends on each institution's business model.
A.W. Pickel, the founder and CEO of Leader One Financial in Overland Park, Kan., said he believes pick-a-pay compensation plans violate fair-lending rules because a consumer shopping for a home loan could be quoted a different interest rate from different loan officers in the same office, based on the compensation of the loan officer.
Like most mortgage professionals interviewed for this article, Pickel declined to name the firms that are most guilty of steering borrowers into higher cost loans based on the loan officer's pay.
But, he said, "I'm amazed at the number of people doing this. The problem is that two borrowers who are similarly situated can get different rates from the same loan office based on the compensation of the loan officer."
Roque described how mortgage banks with several loan offices in the same city operate with a decentralized management so each branch manager controls how the loan officers are paid, and the corresponding office margin, which also varies.
He suggested that if a consumer called the branch of specific mortgage banks in Houston, Kansas City, or Scottsdale, Ariz., for instance, and they were to shop each of the loan officers, their effective interest rate would vary since the compensation plans vary.
In many cases, loan officers choose both their compensation and the branch's margin simply to "get the deal done," he said.
"The clear and explicit violation is that individual branch offices have completely different pricing scenarios for home loans with different rates offered to the consumer on a loan officer-by-loan officer basis," he said.
Offit Kurman's Karen said he advises all lenders, particularly those with pick-a-pay plans, to do a fair-lending regression analysis to ensure borrowers are not being steered to higher-cost loans.
"Anytime you have disparate pricing, you increase the risk of a fair-lending violation," Karen said. "There's no doubt that there will be more fair-lending audits and violations, but I've never heard of a company getting a fair lending audit because of a pick-a-pay plan. But the pick-a-pay plan could be a cause of a problem."
The CFPB designed loan officer compensation rules to be flexible, recognizing that different institutions have different business models.
The CFPB even gave a safe harbor to seven permissible compensation methods that are not based on a loan's terms. Those pay plans include compensation based on the loan originator's overall dollar volume, the long-term performance of the originator's loans, an hourly pay rate based on the actual number of hours worked and a payment that is fixed in advance for every loan.
For example, a loan officer might structure a pay plan to earn 100 basis points per loan and set a minimum payment of $2,500, ensuring a fixed "floor" of compensation if a borrower buys a house for less than $250,000.
But as interest rates rise, increased competition has led to more frustration about compensation plans, and may prompt some loan officers to blow the whistle on competitors.
"It is a competitive war for talent out there, and if someone is trying to be compliant and their competitors are not, they are put in a tough position," said David Stein, the chair of the consumer financial services group at the law firm Bricker & Eckler in Columbus, Ohio.
The main problem with pick-a-pay compensation plans, he said, is that some loan officers try to change them frequently, even on a monthly basis.
"Where companies are pushing the envelope is they are adjusting pay plans with a level of frequency that suggests they are rewarding people for being more profitable," Stein said. "Pay plans shouldn't adjust more than once every six months."
State auditors typically ask mortgage lenders for written copies of their pay plans and try to verify how the plans are structured. But few have the resources to do a deep dive and determine how often plans are being adjusted and whether originators, particularly branch managers, are being paid based on profitability, Stein said.
Consistency, especially over a long period, is critical. Some loan officers try to drive up their prices through incremental changes such as moving their pay from 120 basis points to 130 basis points, from one month to another, lawyers said.
"The LO comp rules recognize that one size doesn't fit all," said Karen. "What you're trying to do is not create incentives for the loan officer to push the envelope."
Kevin Marconi, the chief operating officer at United Fidelity Funding, a wholesale and retail lender in Kansas City, said most loan officers set their compensation plan based on their client and referral base, as well as their personality — and they leave it at that.
The plans may vary because of the different costs required to generate a referral for a home loan. The referrals come from different sources, such as Realtors, a homebuilder or Internet leads.
"There are different costs and time involved in each method of marketing so it's easy to justify that in one single company you would have different comp plans," Marconi said
He also took umbrage with mortgage bankers complaining about competitors' compensation plans, suggesting that making a fuss about pick-a-pay plans would subject the industry to even further regulation.
"It's called competition," said Marconi. "There is still supply and demand. You can't have everyone sell a loan at the same price."
Moreover, consumers are encouraged more than ever to shop around for the best rate. But loan officers have to do the same, Marconi said.
If a loan officer sets his pay at 1% of each borrower's loan amount, but the lender had a higher built-in margin, then the loan will not be competitive and a borrower would opt for a different lender. Another loan officer might set her pay at 3% and work for a lender that has a slim margin, so the rate and cost to the borrower would be more competitive, he said.
Gradually rising interest rates are expected to put a damper on refinances causing overall origination volume to drop about 10%, next year to $1.3 trillion. Refis are projected to drop 35%, to $415 billion, in 2016 while home purchases are expected to rise 10% next year, to $905 billion, the Mortgage Bankers Association has projected.
"Everyone wants the best origination staff especially in the face of rates going up, and when you're competing for sales people, that's what companies are forced to do to compete," Stein said. "Money becomes the common denominator as opposed to building a better culture or service level. Money is the easiest driver, and that's the risk."