Article By: Ben Giumarra, Spillane Consulting Associates, Inc.
Could banks and credit unions exploit an advantage over non-depositories with a shift in how they compensate for HELOCs?
I don’t think this will work for all institutions. But I’m curious why the following wouldn’t work in certain cases. Read on and see if you agree that how banks and credit unions compensate employees for HELOCs might give it a unique competitive advantage.
Let’s start off with some initial observations that I think we can all agree on:
Banks and credit unions are losing market share to non-depository mortgage lenders. (Another day we can argue over why exactly).
All institutions struggle to attract and retain top mortgage originators and staff turnover at this position remains an unusually high risk (threat level orange!) — a critical sales person or team could be recruited away at any moment.
The ability to offer home equity lines of credit (HELOCs) is an advantage that depositories enjoy over most non-depositories.
In general, the HELOC market presents a growth opportunity as home values rise and many consumers remain with first mortgages at super low rates. Also as my colleague Peter Milewskipoints out, HELOCs “can be a creative CRA tool that enables lending for home improvements in low- and moderate-income census tract. The home improvements made to properties with deferred maintenance can help stabilize a street or neighborhood. It can also be a lower cost alternative to refinance-rehab and reverse mortgage for elderly homeowners, who may house rich but cash poor.”
HELOCs are relatively less burdened by regulatory standards than closed-end mortgages. TILA’s anti-steering regulation doesn’t apply to HELOCs, nor does TILA’s limits on loan originator compensation.
The new HMDA requirements are bound to expose some fair lending problems stemming from the incentive to sell closed-end first mortgages instead of HELOCs. This will expose instances where it appears borrowers are over-sold into first mortgages instead of receiving less expensive and more convenient HELOCs.
Current HELOC Compensation
So assuming HELOCs represent a unique opportunity for banks and credit unions (see above), the question turns to how to capitalize on that. One issue that quickly arises relates to compensation. Whether mortgage originators or branch personnel, how do institutions compensate sales personnel for originating HELOCs?
It appears to me that most institutions have simple and low incentives for HELOCs. Maybe they receive a $100 flat fee. Maybe they receive nothing. And that’s understandable in part – it’s difficult to assess the value of a HELOC at account opening, so it’s difficult to compensate originators very heavily up front. Between two borrowers, each with a $200,000 line of credit, one might borrower $10,000 over the life of the line and the other may draw on the full amount of the line repeatedly. How could you possibly know that up front?
Rethinking HELOC Compensation – Crazy Idea?
But if you’re an institution that has identified HELOCs as a unique business opportunity, why not reconsider incentives for HELOCs?
And if you’re still with me, my crazy idea on how to do that is this: Does it make sense for some institutions to incentivize HELOC lending by paying out as borrowers actually use (and reuse) their HELOC? So that an originator can develop a “portfolio” and create a self-producing income stream for themselves?
This appears to be an unusual idea because I can’t uncover anyone currently doing it. But it’s not uncommon in other areas and industries, such as the insurance business.
And I see the following potential benefits:
Reduce turnover risk by mortgage loan originators (why walk away from an annuity income stream?)
Capitalize on a rare advantage over non-depositories by increasing HELOC lending
Ability to structure compensation based on profitability and over time to guarantee the institution comes out on top
Reduce fair lending risk that will be exposed this coming here by new HMDA requirements (sales force no longer incentivized to steer borrowers away from HELOCs and into first mortgages)
I’m going to go out on a limb here and say that, at an institution that currently pays originators $100 per HELOC, originators aren’t going to complain about this new approach. And I envision a clause where an originator leaving the institution would be able to “cash out” his or her HELOC portfolio, although at less favorable terms than if the originator stayed the course.
Now I completely understand this might make no sense for certain institutions, maybe even most (for example, an institution that relies on a culture of referrals between branches and the mortgage department). But I haven’t heard of anyone doing this. My question is – why not?
In Other News
Thanks for taking last week’s HMDA survey – as promised, here are the results to the question of whether your institution is going to voluntarily collect HMDA early to practice:
61.9% voted “Yes – Practice Makes Perfect”
38.1% voted “No – Pray For Repeal!”
Hey we’re in the news! Embrace Home Loans Partners with Spillane Consulting Associates – Mortgage service provider seeks strategic guidance for assisted correspondent program … read article here.
And if you’re still hung up on the “observation” that, generally speaking, depositories are losing ground to mortgage lenders – “The Mortgage Market is Now Dominated by Non-Bank Lenders.”
On My Mind …
How do you decide which company to work for? Which one is best for you? Well Peter Drucker, in his book- “Managing Oneself”- says to think about whether the company’s values are consistent with yours. (Note: Values, as opposed to “ethics”- which should be the same across the board). He wrote that “to work in an organization whose value system is unacceptable to incompatible with one’s own condemns a person both to frustration and to nonperformance.”
Peter Drucker gave an anecdote to explain his point: An HR executive deeply believed that a company should promote from within whenever possible – that hiring for key positions from outside the organization should only be done when there was absolutely no other choice. But then her company was acquired by a larger company . She herself was promoted. But the new company valued “fresh blood” – and believed in bringing in outsiders to fill key positions often for fresh perspective. The HR executive eventually quit after years of frustration.
What are your values, in this sense? I tried this exercise myself and here is part of my analysis:
I want to be part of something exceptional, something worth dedicating your life to, something to be proud of – I would have loved to be part of the NASA team that landed on the moon. I would never last with a team that accepted mediocrity.
I want to see real progress, to be part of creating or improving something (and I want to see it yesterday) – therefore working with institution that is satisfied with the status quo or generally without a sense of urgency would drive me crazy.
I also strongly believe that anything worth dedicating your life to (see above) will require strong teamwork by a dedicated group of like-minded people, all with unique roles. Think a special forces military unit as opposed to Rambo (trying to do it all himself), or as opposed to a normal military unit where some “9:01 to 4:59” mentality is considered acceptable. Therefore, an institution that tolerated anything less than exceptional individual contributions (towards shared goals of course), or an individual trying to “go Rambo” would be insufferable.
“Trust is not a soft skill.” – David Horsager
Thanks so much for reading our weekly newsletters. We’re not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we’re always going to be trustworthy. Your calls and e-mails are very helpful – please keep contributing.
**These are our opinions. We’re not authorized, or willing, to express those of others.**
Thank you to Ben Giumarra, Spillane Consulting Associates, Inc., a member of our Education Committee, who with the support of other experts at SCA have put together this newsletter.