Commentary on Net Branching

By George Allen

The proliferation of mortgage companies offering Net Branch Opportunities has exploded over the last couple of years, and the reason simple. The concept offers an excellent way for lenders to grow with minimal expense. At the same time the Branch Manager enjoys an excellent compensation plan and the freedom to run their branch as they see fit. In this article we'll attempt to define net branching, and offer guidance to the loan officer or manager who is considering making the move and opening their branch.

The most difficult section of this article, although a very important one is defining what a Net Branch is. This is difficult because at the time of this writing, there are over 250 companies offering some type of branch opportunity. With that many companies, it's nearly impossible to identify or define the concept because no two programs are exactly the same. Essentially, net branching is an alternative form of compensation to the manager. Now I know that's pretty simplified, but that's what it is. You may ask; But an alternative to what? Let's look at it like this. You're a top producer at your company, and there's an opening for you to be promoted to manager. More than likely you'll be offered a salary, commission overrides on your loan officer's production, and commissions on your production. You may also be paid based on the profitability of the branch. Your employer will probably negotiate the lease for your location, as well as the office equipment. They'll also direct you when, and if, you can hire additional staff, at the same time setting the salary and commission ranges. I'll call this a "Traditional Branch." The company is taking on the risk that you'll stay there as a happy manager for a long time. Because of this financial risk, the company enjoys a bigger piece of the profit pie, and the manager less. In a Net Branch opportunity, the manager is paid on the net profit of the branch. What makes this an attractive alternative, is that the manager makes virtually all financial decisions. From negotiating the rent, to salaries, or where to purchase supplies. The manager is in control of the operating expenses, and thus in control of his/her income. I'll call this form of manager a "Professional Partner," because an individual interested in this program must be a professional, think outside the box of the traditional employee/employer relationship, and think more like a partner. The manager enjoys a bigger slice of the profit pie. So if I may be so bold to offer my definition; a Net Branch is an alternative form of compensation to the branch manager, based on the profitability of the branch.

Now that we have the basic definition down, where's the confusion? Because there are so many companies offering opportunities today, there are several forms of compensation. There are huge differences. Some companies offer 100% commissions. One hundred percent of what? Does this mean the corporate office earns zero percent? I've heard of the 90/10 splits, and 80/20 splits. How are loans priced? What rates does the manager see? Are they published by the corporate office, or direct from the investor? Are they wholesale prices or correspondent prices with servicing release premiums? What about junk fees? Is the company a Broker, a Banker or both? Who pays the bills? How are loans underwritten and closed?

What about benefits? Who handles payroll?

Since by now you probably have more questions than answers, and you can see how confusing the selection process can be, I'll do my best in the following paragraphs to tell you what to look for in selecting the best company, as well as what to look out for.

What to Look For and What to Look Out For

You may want to use this as a checklist in your interview process.

- Look for a lender that is both a Mortgage Banker and a Mortgage Broker. Some companies out there are really just mega brokers. Heck, if you wanted to be a Broker you could just go get a license, and hang your own shingle. Companies that allow you to act as a Banker with all their benefits may not permit you to broker loans. There are times you'll need to broker.

Mann Mortgage is both a Banker and a Broker. Our managers make the decisions where they want to sell their loans.

- Look for a company that gives you raw pricing direct to you from the investors, with the SRP schedules. How else will you determine you're getting the best pricing?

Mann Mortgage has always given their managers raw pricing. Our program has always been full disclosure of our pricing, costs, fees, etc. We don¹t believe in hiding things from our managers.

- Look for a company that has an experienced in house Sub Prime division, as well as the ability to broker this product.

Handling sub-prime underwriting in-house has always been a risky and inefficient exercise. We do underwrite some non-conforming product, usually tied to some AUS. We feel some sub-prime product is just better handled as a brokered product.

- Make sure the lender has full FHA/VA approvals, as well as Fannie Mae and Freddie Mac.

We have full FHA/VA approvals as wells as FNMA and Freddie Mac.

- Look for a company who has Delegated Underwriting approvals with the large national investors, and an experienced Secondary Marketing department. Not just a loan locking department.

We have had Delegated Underwriting authority with all our major investors for many years. We have an excellent make-sense underwriting philosophy.

We have our own Secondary Marketing Department. We created this department to develop the profits associated with ³bulk trading² of mortgages as opposed to selling loans one at a time. By doing this we can still provide all LO¹s with attractive pricing that enables them to be very competitive in their markets.

- Look for a company with extensive warehouse lines. You¹ll want to be sure the funds reach the table.

We have very adequate warehouse lines that we utilize. It should be noted that our warehouse rates are at a positive spread which creates income during the transition to sale period. It is not typical for a company to pass this along to the branch as we do.

- Look for a company that closes their own loans with the ability to e-mail closing doc's to the settlement table when necessary.

We have state of the art software with a closing module that allows for emailing closing docs.

- Look for a company that'll allow the branches to go directly to DU and LP underwriting systems at point of sale.

Our software allows direct access to DU, LP, CLOUT and other AUS systems at the lowest possible cost.

- Look for a company with accounting and payroll services as well as human resources. You¹ll want to spend time originating loans and making money, not handling employee issues better served by an expert in Human Resources.

We provide complete accounting, payroll and HR functions.

- Look for a company offering Group benefits including 401K plans.

Mann Mortgage offers a full line of Benefits at very competitive prices. Our plan includes a 401K matching program.

- Look for a company that has an experienced IT department offering computer systems and support. You¹re a top producing Loan Officer/Manager not a techie.

We have our own IT department that can help with any sort of troubleshooting.

- Look for a company that offers a marketing department to create brochures and marketing campaigns to help you and your Loan Officers get more business.

Although we don¹t have a formal marketing department we encourage branch interaction to share ideas.

- Look for a company with a legal and compliance department. Compliance, while it may be a pain in the neck, is essential for you to know that someone is watching over the branches and is current with the ever-changing laws. The last thing you need is for some poorly run branch other than your own, to put you in jeopardy by being out of compliance, and causing the company to possibly be suspended from lending by state and federal agencies.

We have a compliance officer and strong operational compliance review.

- Look for a company with a moderate number of branches. This is relative to the support system in place, but a company that has hundreds of branches is more difficult to manage.

We currently have 22 active branches. Our expansion philosophy has always been tied to capacity and managed growth.

- Look for a company that insists on a face to face interview. You and the company must be a good fit. Would you trust your career to someone you¹ve never met? Be sure they allow you to visit their facilities and meet their staff.

When we have a strong prospect, a face to face interview is set up. We want to meet you and highly encourage you to come to our corporate office in Kalispell and our operation site in Helena.

- Look for a company that checks you out extensively. A company that signs on everyone who inquires, without doing back ground checks and checking references, is bound to pick up some bad apples.

We do complete background checks on all branch managers. We are particular about the kind of people we partner with and hope that you feel the same.

- Look for a company the requires you attend a Roll Out or initiation training in the home office for at least three days before you originate one loan. You need to learn the process. Stay away from companies that¹ll tell you ³You're approved. Start sending in loans tomorrow.

Our training program includes onsite training in your office and we encourage you to spend time in our operation site.

- Look out for companies that use salespeople to recruit you. The recruiter who's paid a commission each time he/she signs a branch is interested in only one thing. Signing the next branch, If you feel you¹re being sold, you probably are. Don¹t forget this is your career. A company that doesn¹t see the value in this is bad news, and really isn¹t concerned about you.

Our philosophy has always been to keep connected in all our communities and rely on referrals to add additional branches. At this time we do have an employee that is actively seeking out new branches as growth has become a high priority. We don¹t believe in high-pressure sales.

- Look for a company that will allow you to interview other Branch Managers. Who better to give you an unbiased opinion then people who are living the experience?

We offer a complete list of all our Branch Managers to you in our package.

- Look for a company in good standing with their investors. Ask to speak with their investor representatives, check their standing on FHA Neighborhood Watch. You¹ll have made a bad move if the company is in trouble with its investors or is about to lose it HUD Eagle. Check references. Consider a Dun and Bradstreet report.

We are happy to provide any references you would like. You will find us to be in good standing with all the above.

- Look closely at the compensation plan. If it sounds too good to be true it probably is. The plan must be equitable to both parties. If the company is to provide the necessary support you'll need to get your loan closed, then they need to earn enough to deliver. A company that¹s willing to give the store away eventually will do just that. Give the store away. They won¹t be in business for long, and neither will you. Don¹t be penny wise and dollar foolish. It'll cost you big in the long run.

We strongly believe that when you examine our program and look at other opportunities you will find ours to be very profitable.

- Look for a company that's been offering branch opportunities for more than four years. There have been a lot of lessons learned since the inception of the concept and a company with experience is much better than one that¹s just jumping in.

We opened our first branch in 1993. We have slowly grown to 22 branches always being mindful of capacity and providing our Branch Managers with the best customer service.

- Look out for companies that will pay you via 1099 or pay your corporation or LLC. In order to originate FHA loans you must be a full time W2 employee of the company. The IRS also has strict requirements for 1099 compensation. You must meet the ³Contractor Test².

All our employees are W-2.

- Look out for companies that require you to deposit personal funds as initial start-up costs or operating expenses in the company account. This is in violation of HUD Mortgagee Letter ML 00-15. You are after all an employee, and an employee can not be required to deposit their own money or cover company expenses as a requirement of employment. It would be like telling your new receptionist that he/she must deposit $200 in the company account before sitting down at the phone.

Mann Mortgage does not require an initial deposit.

- Most importantly look for a company that is committed to this business, and is interested in seeing you succeed. A company that cares about you and your business will be looking for ways to grow together.

Our Mission Statement is very clear: We are dedicated to the success of our Branch Managers. We feel we provide all the benefits that the larger organizations do on a more cost efficient, personally rewarding basis. Our ³economies of scale² allow you to be a full-fledged mortgage banker with all the pricing and operational benefits associated.

Copied from Mortgage Report Volume 16 No. 6 June 2002