A Virginia-based mortgage lender has launched a loan officer compensation plan that provides originators with a piece of the loan servicing fee.
Typically, a loan officer closes a loan and gets paid a commission, then moves on to the next loan. In this respect, they don’t need to worry about the future performance of the loan. It’s a done deal and they can focus on bringing in more loans.
However, the loan servicer (which is sometimes also the lender) will earn money throughout the life of the loan as monthly mortgage payments are made.
Now one lender has decided to share a portion of this ongoing revenue with its top producing loan officers.
Atlantic Bay’s Progressive Earnings Plan
Atlantic Bay Mortgage Group out of Virginia Beach, Virginia refers to this participation in the income stream of the loan as the “Progressive Earnings Plan.”
The way it works is fairly simple. If you’re able to muster $14 million in retail loan production in a calendar year, you can take part.
For every loan funded that is retained by the company, Atlantic Bay will give a portion of the servicing fee to the loan officer who originated the mortgage.
As you can see from the chart above, a loan officer able to produce $120 million annually could receive an additional $30,500 the first year, $60,000 the second year, and a whopping $197,000 in year seven.
A more conservative figure of $15 million in annual production could net the LO an additional $3,800 in year one, $7,500 in year two, and $11,800 in year three.
After seven years, that number rises to nearly $25,000 in extra annual income.
Of course, this all assumes that 65% of the loan production will be retained (that’s how much Atlantic Bay Mortgage Group currently services). And they’re just estimates.
The rest of their loans are ostensibly sold off and as such, do not earn any revenue via the Progressive Earnings Plan.
In any case, this extra income provides loan officers with an ongoing revenue stream that can be a lifesaver if they happen to have a slow month here and there.
All loan officers experience slow months, so receiving a supplementary income to offset any temporary decrease in earnings can certainly help.
Is This Type of Compensation Better for Loan Performance?
One could also argue that aligning compensation with ongoing loan performance might improve the quality of the underlying loans.
Sure, the loan officer still gets paid for making the loans, regardless of what happens to them in the future, but knowing they can earn ongoing revenue might foster better lending.
As a loan officer who earns servicing income, you’ll want your loans to perform for years to come. So loan officers under this plan will be incentivized to make the best loans possible.
During the financial crisis, there was criticism of the so-called originate-to-distribute model, which basically provides incentives for loan volume regardless of quality.
Essentially, most mortgages back then were originated and quickly sold off to investors instead of being retained by the lender. And it just so happens that these types of mortgages default at a higher rate.
It’ll be interesting to see if other lenders follow suit and give their employees a slice of the servicing pie.