​Is Commission The Best Payment System for Loan Originators?

By: Stephanie Diana Gast- Wilson

So, to give some back story to the topic noted in the title.  I am taking an HR Human Behavior course within my Master’s program.  The term long case study we are examining is a company that used a Scanlon bonus pay plan to encourage morale long term and if this was shooting the company in the foot and if so what behavioral plan would you put in place to get the company back on track?  Of course my plan is to use six sigma cross training to not only develop appreciation at all levels for what each employee contributes but it empowers the employee by making them feel invested in and developing additional transferable skills should they be laid off.  Also allowing the company to be able to run lean with a skeleton crew if needed and find other cost saving strategies through entire company collaboration.  


However, when doing the research I found that studies since the 90’s show that bonus and commission pay plans are meant to be temporary quick morale boosters and tools for startups to keep costs down till the company can have a salary and hourly system put in place as they gain money.    According to an article in the Harvard Business Review there is a direct statistical link between quality falling and incentive plan pay systems.  You can find the article written by Alfie Kohn at  https://hbr.org/1993/09/why-incentive-plans-cannot-work.   Even the Society of Human Resource Management has an article from 2012 on the pitfalls the incentive pay plans have within the view point of HR and the employee/ work force behavior. The article can be found online at https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/incentivetips.aspx.
This got me thinking with all the issues that the mortgage industry has had and now the push for quality control and compliance focus why is the mortgage industry still paying sales people commission and no base?  I work with sales people all day long trying to help them navigate the underwriting guidelines with regard to condos.  

What many may or may not know Realtors, Loan Originators, Loan Officers, Account Executives, Account Managers, Sellers Agents, Brokers Mortgage Loan Officers, etc., are the sales force in mortgage and they are only paid based on a percentage of the loan that is being taken out.  Investopedia has a great article that details the way that sales people in this industry are paid. 

“Loan officers get paid in a way that they call “on the front” and/or “on the back.” If a loan officer makes money on the front, that means they are charging for things that you can see. This money is either out-of-pocket or is incorporated into the loan when you sign the papers. These are things like processing fees and other miscellaneous charges that are charged for processing your loan. If a loan officer makes money on the back that means money is being received from the bank as a sort of commission for filing the loan.”  

You can read more on this article at http://www.investopedia.com/articles/pf/lending-loan-officers-perspective.asp.  Also you can get more info on a similar article by Forbes.com at http://www.forbes.com/sites/learnvest/2013/07/17/secrets-of-a-mortgage-loan-officer/#681157e839c0.

So, since studies show that quality takes a hit when sales people are paid in an incentive based pay plan why do we keep using that same system in this industry?  Right now every lender in the country is looking for sales reps and coming up empty because of a number of reasons.  Some reason I hear from those I know who have left the industry include are numerous but the root is the pay scale and how the compliance focus has made the job even harder for sales people.  When really it is only harder because, the pay plan is set up for quantity over quality while demanding higher quality.  Which is absurd when you think about this issue with a global view within the Business Administrative and Operations Management scope.  
Another thing that many who do not work in the academic aspects of mortgage may or may not know is that the risk assessment model that the mortgage industry has been using until 2010 was the same one used since 1945. In the risk model developed for mortgage post World War II it viewed mortgage loans as a win, win for the lender.  The reason it was seen this way is if the borrower defaulted then the bank got the property back and could sell it off again. Which led to the development of lending products that created a potential for subprime issues.  However, as we all saw in 2008 that isn’t always a win, win in the event the whole company has a financial collapse.  There is a great working paper written by Robert Ban Order at the Stephen M. Ross School of Business at the University of Michigan which can be found at https://deepblue.lib.umich.edu/bitstream/handle/2027.42/55317/1086-VanOrder.pdf?sequence=1&isAllowed=y .  The scholarly article not only breaks down the history but also the math.  (Which again is why I feel mortgage should be pushed as a career path at the college level and looked at as a STEM field.)  We often forget about the detailed math and science that goes into developing the guidelines and risk analysis in mortgage.

Which brings me back to my original question should we still have a commission based payment system for sales people in mortgage?  We need to face facts sales people when paid in a commission/ incentive payment plans quantity becomes the game.  Cause if they don’t make sales they don’t eat.  If sales reps don’t make sales they can’t make the basic living needs.  And this payment plan sets sales reps up to fail.  

If the mortgage industry makes an overall change to provide a base pay to sales professionals the research suggests that the industry will stop feeling like they need more sales people to keep up with quota and people leaving the industry.  It will also promote quality which will lower the industry wide repurchase issues.  Furthermore the research shows that if the industry wide increase in quality starting with giving a base pay to sales reps then sales will increase.  Mostly because, sales reps will have a product that isn’t such a hard sell.  Sales people are the back bone of the mortgage industry but they are paid in a way that statistically sets them up to fail and have constant low morale.  That’s not fair nor is it logical from a business stance. When employees feel stable and empowered they perform miracles. 

This is theoretical though.  But, I welcome people to send messages on twitter and facebook.  Condo Land’s facebook page can be found under the name Condo Land Blog.  Send tweets to @sdgwwgds.  Also leaving comments on this page is helpful too.  Remember sharing is caring and if you found the info in this article informative and helpful.  

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