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Ben Giumarra
A different method of compensation for HELOC originations might give some banks and credit unions a strong advantage over non-depository institutions. So why aren’t any institutions trying this?
Let’s start with some observations:
First, depository institutions are losing ground to specialized non-depository mortgage and consumer lending companies. Mortgage lenders are making greater strides in customer service, closing speeds, efficiencies, technologies and market shares than their depository peers. (Generally speaking, of course.) Why is this happening? Well, I suppose we could debate that forever. Maybe the increasingly complex mortgage/consumer lending industries just require more focused attention. Perhaps regulatory burdens are hitting depository institutions harder. Maybe conservative boards of directors are stifling innovation and limiting competitiveness.
Second, the market for mortgage loan originators is tough. Many depository institutions are highly reliant on individual sales officers, having failed to develop healthy online or third-party origination channels. Yet avoiding turnover at this position is difficult given the willingness of non-depositories to aggressively pursue established sales representatives.
Third, the ability to offer home equity lines of credit (HELOC) is an advantage that depositories have over most non-depositories, who rarely have the ability (or incentive) to offer these in large quantities.
Fourth, the HELOC market presents a serious opportunity for growth for the foreseeable future; as home values rise (and equity grows), many consumers remain locked in to 30-year mortgages at super low rates. Also as my colleague Peter Milewski points 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.”
Fifth, most depository institutions don’t incentivize originators to originate HELOCs, at least not very heavily. It’s difficult to assess the value to the institution 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 what to pay an originator upfront? HELOCs are also generally easier to originate the first mortgages.
Sixth, 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.
Seventh, 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. Previously unreported, all lenders with 500 or more HELOCs per year will have to collect and report HMDA data for HELOCs. This will expose instances where it appears borrowers are over-sold into first mortgages instead of receiving less expensive and more convenient HELOCs.
Imagine two borrowers with the same credit profile walk into a bank on the same day: They each have an existing mortgage at 3.25 percent interest with 60 percent CLTV, representing $160,000 in equity. They both have a child entering college, and while they’ve saved to help with tuition, they want to be financially prepared, especially for items they may be unable to predict or haven’t decided upon yet. Imagine borrower speaks with a branch personnel and gets a $50,000 HELOC with no closing costs. The second borrower is referred to a mortgage originator and decides to refinance his existing mortgage at a 4.25 percent to pull out $50,000 in equity, which he plans to store in a savings account. There might be a perfectly legitimate explanation for this, but you can see how there is a risk of potential disparate treatment, right?
Stay The Course Or Cash Out
So my thesis is this. Depository institutions should structure originator compensation to incentivize HELOC lending by paying out as borrowers actually use (and reuse) their HELOC. While unusual in the financial industry, this is a familiar compensation structure in other industries, such as the insurance business. This would both incentivize HELOCs, capitalizing on an advantage over non-depositories, and help reduce turnover by mortgage originators, whose loyalty would be tied to an organization where it can build a portfolio of HELOCs. This could be done based on profitability, because HELOCs are not subject to TILA’s compensation limitations.
I’m assuming that, at an institution that currently pays originators a $100 flat fee per HELOC, originators aren’t going to complain about getting paid years later. 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.
But I haven’t heard of anyone doing this. My question is – why not?
Ben Giumarra is a risk management consultant with Spillane Consulting. He may be reached at BenGiumarra@
SCAPartnering.com or (781) 356-2772.
