"So Rob, How Do You Get Paid?"
Not all of my clients will come right out and ask this question. But even where they don't ask I suspect that most of them think it. Not only is it a fair question, it's a great one too. One that I have no problem discussing and explaining. Sure there are elements of our compensation that are highly technical --- the result of the byzantine regulation that keeps our industry in a chokehold ---- but I still think we can have an honest discussion about how I get paid and how, in turn, this relates to the rate and terms a consumer will obtain when working with me to get a home loan.
In addition to all real estate being local, it is also really quirky. Most people who buy and sell a home know exactly what the real estate agent is being paid. Here in the San Francisco Bay Area, for example, a 5% total commission on the sales price is common, so if selling a home worth $1MM, the listing agent would gross $25,000 and the same for the selling/buyer's agent. But in the case of financing, there are far more "moving parts" and trying to determine how your lender is paid can be, to paraphrase, a riddle wrapped in a mystery inside an enigma. Why is this?
Memories. The Way We Were.
Back in "the day" loan originators had tremendous flexibility over their compensation. There were a lot of ways for the originator to obtain revenue in the loan; the rate itself, charging up-front "points" on the rate, collecting various fees, etc. Sort of like the auto dealer who can work with the trade-in value, the cost of the new car, the rate on the financing, and so on. Now this doesn't mean that the consumer always got a bad deal as a result, it just implies that there were more tools in the "let's make a deal" toolbox. All this has been simplified, for better or worse as we'll find out below, and now we are down to just two ways:
- By the lender. This means that the originator's profit is built into the rate you choose. It is paid by the entity that is providing the funds (bank, credit union, hedge fund, etc.).
- By the borrower. Yep, that's you. This means that you can pay the originator directly. If you do this, however, the originator may not also obtain revenue from the lender. It's an either/or proposition.
So are you ready to pick your poison? Which will you choose? Lender or borrower paid? Let me help you. It's not up to you. Regulators have already forced your originator's hand and the vast majority of originators, including the big banks, are now operating on the lender paid model. Remember, this is not inherently better or worse, but it's the way the industry has responded to regulation that does not permit the consumer and originator to negotiate terms. We'll cover this next.
Learning to Be Present
Cell phone in hand, I have been accused by my wife more than once that I am not being "present," but when it comes to loan officer compensation in the modern world, most of us have a compensation setting that cannot be changed. Once you set it (let's say it's 3/4 of 1% of the loan amount) nothing is changing regardless of loan type, interest rate or borrower characteristics. This, of course, is aimed at preventing disparate treatment of customers. But how it manifests itself can be put in simpler terms --- we cannot go on sale or make a deal. If another originator sells my client a lower rate, no matter how inexperienced that agent may be, no matter how dismal their execution and no matter how inaccurate I feel their quote, I cannot "match or beat." Here's why. Regulation says that if I have the power to cut my margin and make Carrie-Careful-Consumer-with-the-Clean-File a better deal because of all of her research, then what's to stop me from hiking the rate on Carl-Care-Less-with-the-Compromised-Credit? In short, with no flexibility, nobody gets helped and nobody gets harmed. So, there are two takeaways here:
- Your lender cannot treat you any different than anyone else. One size fits all. This holds true for the rate and program too. Whether you get a rate of 3% or 4% or 5%, or a 30-year fixed rate loan or 5/1 ARM, the originator's compensation will be the same.
- Your loan originator's compensation settings have been determined before you walk in the door, and they're not going to change no matter how much he/she likes you or vice versa.
Like with financial regulation in general, I have noticed there is a public sense of relief that the concepts they do not readily understand now have stopgap measures to prevent abuse. As an ethical loan officer with a 5-star reputation developed over 16+ years, I like that idea to the extent that I dislike the lack of discretion we can exercise as a result. In environments where regulators have also set maximum debt-to-income ratios I would LOVE the ability to reduce my margin on a loan and make a qualification work for the borrower who otherwise just misses the mark. Yet we have to accept that if we want a heavy-handed watchdog, we will not be at liberty to do all the things we'd like, even if nobody gets harmed in the process. In a perverse irony of scale that is just too big, the "too big to fail" legislation that encompasses loan officer compensation rules has only made the large banks larger and, some would argue, fostered the emergence of the call center loan agent --- tech savvy, but not technically guideline savvy. I maintain that real estate transactions are inherently complex. If the good people can't be paid at their grade, they leave the industry and take their experience with them. And that leaves the rookies minding the store. Trust me when I say that top Realtors do not want their clients working with inexperienced loan agents. There's simply too much at stake.
Perhaps the question of how we get paid is more involved than you'd imagined. Much of what is now law runs counter to the way business is done in most other segments of the economy and those shopping for the single biggest investment they'll likely ever make need to know that. Personally, I choose to price competitively, out of the gate, but that's always been my philosophy. Curiously though, I sense that average revenues in the industry have gone up as a result of us not being able to negotiate. Because of the "take it or leave it" choices that are left, consumers, in turn, are sometimes forced accept higher rates than they could have otherwise obtained via research and negotiation. Of course the cost burden of implementing and supporting all of this regulation is an expense the consumer ultimately bears as well. These are both unfortunate.
So, I am glad you asked, "Rob, how do you get paid?" While not a simple answer, the understanding that results will allow you to identify the best deal you can given the choices that remain.
Dollars and sense,
LendUSA, LLC dba RPM Mortgage NMLS #1938 Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act.