Coming off one of the worst financial crises in history, CMP has been hearing a common sentiment when talking to people in the mortgage industry: relationships between brokers and lenders are more important than ever. It only makes sense, then, that in these changing times lenders are looking for ways to solidify ties with brokers and aggregators who mean serious business. Broker status and loyalty programs are an increasingly popular way of building relationships and go beyond standard volume bonuses in an effort to make a mortgage lending business more profitable and efficient.
Jeff Atlin, a broker with Abacus Mortgages and president of IMBA, recalls FirstLine's Platinum program being one of the first and most prominent status programs for brokers. These types of incentive programs are now a part of both large and small lenders and take on a variety of structures and requirements.
"There are the straight volume bonus programs, there are the VIP programs where, based on volume, you may get preferential things like free appraisals or rate concessions, and then there are the reward-type programs," says Atlin.
Lenders' reasons for having these types of programs - or, in some cases, preferred lists that restrict lending to a number of select brokers - is to attract a top tier of reliable brokers who will send them consistent business (or, on the flip side, filter out brokers who don't give them strong deal submissions).
The economy could be an indicator of why lenders are moving more strongly in the direction of status programs (Macquarie Financial, Resmor Trust and ING all introduced them in the past year). But Sebastien Kuperhause, national sales manager, business development, National Bank, says it's more likely a signal that the mortgage industry is evolving and changing.
"What's happening in the industry today is similar to when volume bonuses started being based on an aggregated number. More and more lenders are creating or modifying their incentive programs to the benefit of the brokerage community," Kuperhause says. "The current changes are more of a sign of the times, just like approved-to-funding ratio requirements are become more prevalent with lenders."
While status and incentive programs can benefit all parties involved, there is also a question of objectivity and how much influence rewards have on where brokers send a deal. There is also the argument, however, that closer relationships with lenders can mean mortgage professionals get better deals for their clients. The lender's side
Earlier this year, ING's direct broker team decided to look at its business model and change the way it worked with mortgage professionals. Because of its smaller size, George Hugh, the team's vice-president of lending sales, says he wanted to find ways to make operations more efficient by working with fewer brokers who had at least two years experience and could bring in a minimum $5 million in volume to ING annually.
"We've become very selective - in fact, we've cut the number of ING-approved brokers in half this year to improve service to existing brokers," Hugh says, noting the feedback has been positive so far.
An additional advantage to working with fewer brokers, he adds, is being able to better communicate ING's mandate to them and educate them about what deals fit best. After cutting down its number of approved brokers to about 500, ING also introduced a new incentive program in March. Brokers at one of three status levels receive various bonuses and promised service standards like same day turnaround time.
Since implementing a preferred list and an incentive program, Hugh says he has seen a marked improvement in the quality of business ING gets from brokers.
"We've found that if there is a broker who has a good relationship with us and they have a questionable deal, we find they'll send it to other lenders and not jeopardize their existing relationship with us," says Hugh. "When you have these incentive programs, not only does it give you consistent and reputable volumes, we find that the business is cleaner."
Kuperhause, who recently worked on revamping National Bank's Most Valuable Partner program, agrees that incentive programs are an effective way to create stronger ties with brokers and encourage them to bring in solid business.
"The idea behind the incentive program is not to drive volume, but to reward the right behaviours and show our appreciation for the business being sent to us," he says. "Brokers are provided with a competitive advantage and this helps lenders by making sure that brokers know how you underwrite and they know what your requirements are, so they send you deals that fit your box and work for the client. Everybody wins."
The efficiency factor
While most status or incentive programs have volume and deal targets, lenders are also zeroing in on efficiency and looking at the quality of deals brokers send to them. Not all programs list efficiency targets, but funding ratios are important considerations for lenders, especially because processing mortgage applications takes up valuable time and resources.
"For every 10 deals in the door it costs us about $250 to underwrite a deal, so it's costing us $2,500 before a deal is even funded," Hugh says. "We were finding that a lot of people have funding ratios around 50 per cent, so out of the 10 deals, five will fund and that means we've wasted $1,250 on five deals that haven't funded. This is an example of where we can incent our valued brokers from an efficiency point of view."
Hugh adds that ING looks at three key ratios to see if brokers are on target efficiency-wise: approval rates, signback rates and funding ratios. If a broker is lagging in efficiency, they will more than likely lose their status, he says.
The prime lender Street Capital operates with a similar mandate. Brokers who are part of the company's street pricing status program - which consists of two "club" levels, president and CEO - are expected to maintain a "commitment to fund" rate of 65 per cent or higher, says Paul Grewal, president. The reward (if the volume or deal level is met) is an extra five or 10 basis points to either the bank or offer as additional discounts to clients.
Although efficiency is an important factor, not all lenders require a broker to reach certain funding ratios or volumes to be rewarded or continue being an originator with them. An example of a lender that operates this way is Home Trust, which has no status program in place. It offers all brokers the same commissions and approaches less efficient brokers to discuss possible problems instead of cutting them off.
"If a broker has a poor closing ratio, we ask first what we could do differently to help and then we work with them to educate them on our programs and help them close more deals," says Home Trust president, Nick Kyprianou. "This strategy has served us well in growing our business and volumes from our brokers, so I don't see a need to change the course."
Joe DiGiambattista, senior vice-president of Abode Mortgage Corporation, operates with a similar mandate for the brokers he works with, saying he doesn't have efficiency and volume targets because he prefers a one-on one approach.
"If I was a huge operation, I'd need to have the efficiencies, but being a smaller operation, I take advantage of the fact that I can pick up the phone and talk to people," he says.
The objectivity question
Status and incentive programs hold obvious benefits to mortgage brokers, but there is a risk of becoming too comfortable with one or two lenders and, consequently, impeding objectivity and cutting down on choice for the customer.
While Atlin says there is the potential for abuse when it comes to these types of programs, he doesn't see it as a major problem in the industry. And although he adds that he generally doesn't generate enough volume with any one lender to be part of a status program, he believes that other brokers can get benefits for their clients by being part of them.
"There can be a lot of positives for the consumer - lower rates, better service, faster turnaround times," he says. "And the rapport a broker can have with a lender because of these things might allow for a marginal application to be approved and it may ease the flow of documents back and forth."
Legislation in Ontario, Alberta and B.C. state that mortgage brokers must disclose benefits they receive from lenders to their clients (generally in writing), although they don't necessarily have to quantify amounts of bonuses or discounts, for example.
"At IMBA, we expect our members to disclose benefits and we expect our members to do what's best for the client, not what's best for themselves," says Atlin.
Objectivity might also be protected by the fact that lenders have different requirements and specialize in different types of loans, making it less likely for deals to be sent to all one place. The incentive would apply more to a standard 'A' client application that could fit with several different lenders.
From the lender's point of view, Hugh says he thinks brokers are familiar enough with status programs to understand why they're in place. They also serve to further reiterate what types of deals lenders want and what types of mortgages they can and cannot service.
"I think brokers are really understanding and embracing the need for changes," he says. "It's very difficult to launch loyalty and status programs that meet your needs as well as the broker's needs, so we're very careful about that and not having it be one-sided. That's the main challenge for us - making sure it benefits everybody."