Just a year ago, some people in the industry were speculating that mortgage brokers were going to transition into bankers as loan volume decreased during the credit crunch. In reality, brokers have turned into branches.
Fueled by the shortage of warehouse lenders, these former brokers are becoming branches or affiliates of larger mortgage lenders. In the past, this move on the part of the broker was considered a loss of independence. Today, autonomy takes a backseat to survival.
With the new Home Valuation Code of Conduct guidelines for appraisals, tougher underwriting guidelines, the possible elimination of yield spread premium by the Department of Housing and Urban Development and simple access to capital, brokers are migrating to a branch setting to survive.
Consolidation is a smart business decision for brokers, because it gives them access to warehouse lines and reduces back-office activities associated with running a lending institution. It also strengthens a broker's own operations and efficiencies by integrating with the mortgage company's technological capabilities and capital infusion.
Consolidation also benefits the mortgage company, because it expands its national footprint into additional areas and regions, and enables it to attract veteran mortgage professionals.
Lending organizations that add branches have a number of challenges ahead of them that can roughly be divided into four areas: administrative challenges, geographic obstacles, alteration of the loan origination system and the upgrading of the accounting system.
First of all, the administrative burden of managing a large number of branches can be daunting. From the lender's perspective, adding former brokers as branches means that these brokers are now employees and that the lender is responsible for its operational expenses. The employee aspect creates an immense burden on the human resources (HR) department.
In addition to payroll challenges, there are licensing issues that need to be addressed. Each branch must be licensed in the state in which it operates. Each loan officer also must be licensed and needs to maintain that license. Managing the status of all those licenses most likely falls on the HR department.
Moreover, contracts need to be drafted for branch managers, and the company must develop an orientation process to introduce the branch manager and key personnel to the lender's policies and procedures.
Managing the operational aspects of the branch is not a trivial process. The lender needs to have systems in place that ensure that the proper branch is charged when entering transactions into the accounting system. If the lender's accounting system relies heavily on spreadsheets, a change is most certainly needed.
Branch managers, especially those who have operated independently, expect timely and accurate data about their branches. Using spreadsheets to meet this need is extremely costly in both time and personnel.
In addition to management's need to control each branch is the branch manager's desire to manage his or her own location. Being able to report financial information to the branch in a timely manner is key. If the lender cannot present timely information to the branch on loans funded, income earned and expenses charged, the branch manager would call and hound the corporate office to find out about the status.
Geographically, new branches may be disbursed over a wide region – if not the entire country. Lenders should incorporate budgets for travel, technology and telecommunications costs.
Aside from the marketing effort involved to attract the broker into becoming a branch, the mortgage company's leadership needs to visit its newest branches. Some of the fraud experienced by earlier "net branch" operations can be traced to the fact that branches were added without anyone "kicking the tires." Technology, no matter how sophisticated, cannot replace the power of in-person meetings and due diligence.
Today, the Internet makes it possible for branches anywhere to be connected to the corporate office 24/7. The branch can have access to the lender's loan origination system (LOS) and accounting systems any time of day. Parent organizations need to invest in infrastructure to maintain connections with their branches.
An important element in keeping the branch is giving it timely access to information about the branch's activities. Having access and being able to use those systems are two different things. An investment in additional users to both systems should be expected.
In addition to being connected technologically, communication between the lender's headquarters and individual branches is necessary. The disconnect between the branch and corporate office can lead to larger issues, namely the opportunity for a branch manager to broker loans to another lender. Knowing which loans any given branch is working on can prevent this problem from occurring.
Changes may be needed to the LOS. The lender's accounting and LOS may not be adequate, and changes to both may be needed. Even if the systems have the capability and capacity to handle a branch environment, alterations to implementation may enable the organization to better handle the demands of a branch network.
Whether the lender is adding branches for the first time or adding branches to an existing branch network, the organization must evaluate its LOS. Some questions that must be addressed include the following: Can each loan within the LOS be identified with a specific branch? Is the branch coding offered by the LOS sufficient? A two-digit branch code, for instance, will not work if the organization expects to add more than 99 branches.
The system may need to be modified to accommodate the coding assigned to each branch. Depending on the anticipated number of branches, the "branch code" structure itself may need to be changed. Any change to the branch code in the LOS has to be pushed through to the accounting system.
The accounting system, the often-overlooked technology in the mortgage industry, is key to managing a branch network. Any organization thinking of expanding should determine if its accounting system is up to the task of managing an onslaught of branches.
Evaluation questions for the accounting system include the following:
- Does the existing accounting system allow the lender to manage branches?
- Can the existing accounting system accommodate the branch code being considered for the LOS?Â
- If the existing accounting system can report by branch, is it capable of "rolling up" those branches by region or type of branch?
- What technology will be used to disseminate financial reports to the respective branches?Â
- What kind of staffing does this entail? Some accounting systems do a much better job of recording and reporting transactions by branch, but very few can handle recording transactions at the loan level – an essential reporting feature for organizations with a network of branches.
One problem that many branches face is a lack of access to updated financial information. In some cases, the financial reports they receive from their parent organization can be days or even weeks old. Outdated information is a severe handicap for a business that depends on a number of factors that change on a daily basis.
Branches need access to reports that provide them with information such as loan-status updates, loan-level accounting reports, branch profit and loss reports, branch check register reports and originator performance reports.
By disseminating loan information through a secure network over the Internet, branch managers have access to up-to-date reports and loan information, eliminating the need to follow up with the lender's headquarters. With this information on hand, branches operate with more flexibility and authority, because their workload is decreased due to fewer bookkeeping responsibilities.
Sharing financial information with branches for their specific locations provides them with enough independence to work productively, but also enables the parent company to control the dissemination of the information to make sure the correct person sees it.
As in the past, successful lenders will adapt to the changing mortgage environment. These changes may not be easy, but a lender's ability to convert brokers into branches will, in many cases, determine that lender's ability to succeed. The technology employed by the lender becomes a critical component of that success.
Brian Lynch is the president of Irvine, Calif.-based Advantage Systems Inc. He can be reached at (949) 250-0260.