There was an element of déjà vu in how our industry responded to 2020’s breathtaking volume.
Lenders staffed up across the board — especially in the back office — often paying a premium for skilled personnel who would likely not be needed even for a year. ‘Staff up and pay up’ is an age-old lender business routine. Despite digital advances in the borrower-facing mortgage front-end experience and remote-closing options that help meet physical-distancing requirements, the past decade’s innovations mostly bypassed lenders’ back-office operations. Mired in legacy workflow, it is no wonder lenders’ back-office operations were notably strained over the last 12 months.
Nor does it take back-office expertise to find the problem. You just need to understand the data. In this case, lenders’ staffing and compensation data clearly tells the back-office story. For example, when we look at 2020 aggregated data, we see that processors were staffed up more aggressively than other roles. Our clients’ volume was up 106% quarter-over-quarter from Q4 19 to Q4 20. However, the data shows that while lenders hired one person for every two processors already on staff — a 50% increase — only 27% more originators were added.
Taking it a step further, this data tells us that lenders hired 85% more processors than LOs to manage the 2020 volume increase.
Lenders may know in their gut there is a problem scaling back-office operations, but this data confirms and helps lenders put words around that gut feeling. Learning from how staffing resources were allocated relative to volume can help lenders prioritize their next wave of infrastructure investment.
With processors and operational staff mostly salaried and receiving a per-file bonus and LOs typically receiving a low base salary plus a pay-for-performance commission formula (105.2 BPS was Q4 2020 industry average), it has made sense that lenders’ early digital innovation investments have applied to the demand side of the transaction. Not only is that where the customer enters the door, but also labor on the fulfillment side of the transaction is comparatively less costly. Where staffing costs are lower, it is arguably easier to tolerate inefficiency.
However, during last year’s prolonged period of high volume, it became clear that there may be a fly or two in that ointment in the form of a seemingly disproportionate, attention-grabbing compensation imbalance and the risks presented by persistent back-office inefficiencies.
Per-loan bonus compensation earned by processors increased 21% to $128 per loan in Q4 2020, earning processors an average production bonus of $2,503 per month (vs. $1,569 in 2019). Viewed by outsiders, the imbalance between a monthly LO commission of $25K and processors’ incremental 20% salary bonus is profound and, making it even easier to misconstrue, tends to fall along gender lines in a male-dominated industry. “Bad optics,” as they say. As an aside, because our firm sometimes releases trend data, we’ve had multiple inquiries from news reporters about the spike in LO commissions, so it will come as little surprise if the topic garners more attention in the coming months.
Whether to stick with their current model or rethink compensation is a lender’s strategic choice.