STRATMOR PeerViews Bank Mortgage Referral, Compensation and Accounting Practices JULY 2015

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1 STRATMOR PeerViews Bank Mortgage Referral, Compensation and Accounting Practices JULY 2015

2 Contents 2 Background Key Findings and Conclusions Detailed Findings

3 Background 3 The Bank Mortgage Referral, Compensation and Accounting Practices survey was the fourth survey issued under STRATMOR s new PeerViews program PeerViews is a fast turnaround small-survey program that gives senior mortgage executives a unique way to obtain specific qualitative mortgage industry information about: What senior executives at other companies think about issues and significant new industry developments. What actions they are considering, planning or have taken. This PeerViews Bank Accounting Practices survey was launched on June 12 and remained open until June 30, Invitations sent to 631 individuals representing 346 unique lenders. Responses received from 38 unique lenders (an 11% response rate)

4 Summary of Key Findings 4 While over 80% of respondents expect referrals from at least one business line at the bank, 72% believe that their current structure is NOT maximizing referrals. This perception is consistent with STRATMOR s consulting experience showing that banks do not do a good job of cross-selling mortgage to deposit, wealth management and commercial customers for a variety of reasons including a reactive sales force, weak marketing skills, limited internal referral tracking systems, etc. The predominant Loan Officer structure within bank mortgage units is a hybrid structure where LOs are responsible for handling mortgage leads provided by bank units as well as developing leads independently. The physical location of LOs can be in bank branches, independent mortgage offices or a combination of both. A substantial minority of banks also have LOs that function independently from the bank. In these structures, LO compensation is predominantly paid for by the mortgage operation. Call Center LOs are used by more than half the respondents as part of the bank s coverage of bank branches and referrals and, increasingly, cross-sell of mortgages to deposit, wealth and commercial customers. While 82% of respondents expect referrals from retail bank branches, roughly a third expect referrals from, or partner with, the Wealth and Commercial areas of the bank. STRATMOR believes Wealth and Commercial customers represent a substantial mortgage opportunity. In only 30% of the banks, does the mortgage operation pay for referrals from other bank units. These free leads can lead to distortions of net production income.

5 Summary of Key Findings (cont d) Incentives are not structured to encourage LMI or CRA type business Banks which believe that referral business is not being maximized cite a variety of reasons, including: Lack of, or inadequate size of, individual incentives to bank staff Lack of a solid sales structure in the branches an operational focus Lack of good referral tracking systems Competition from other business units for referrals 5

6 76% of the respondents indicated that the mortgage operation is a division of the bank vs. a subsidiary o o 6 Use of a divisional structure may imply a tighter integration of bank retail functions with the mortgage operation, and can limit the need to meet complex licensing issues in some circumstances A subsidiary operation usually suggests that the mortgage operation was built upon an acquisition of a standalone independent mortgage lender by the bank. How would you describe the ownership of the company?

7 The respondent sample includes lenders that span regional players through those that lend nationally 7 Which best describes the number of states in which you originate loans? o o 20% of respondents are regional players who originate in 3 or fewer states Approximately 40% of respondents originate in more than 10 states with the majority of those originate in more than 40 states

8 8 All of the respondents originate in the Retail channel using traditional Loan Officers. Over half (53%) of the respondents also originate loans through a call center or Consumer Direct Channel. 63% of respondents originate loans in multiple channels: o For those that originate in multiple channels, Consumer Direct is the most likely channel, with the balance being split between Broker and Correspondent. o We believe that the growth of the Consumer Direct channel reflects a desire to serve small bank branches more efficiently and increase cross-sell of mortgage to banking customers. In which channel(s) does your company do business?

9 Only 2 respondents or 6% originated over $5 billion in volume in The majority of respondents (47%) originated less than $500 million in all channels in Another 47% of lenders originate between $500 million and $5 billion. 9 What was your origination volume across all channels for 2014?

10 10 34% of the respondents operate 10 or fewer Retail Bank branches 45% operate on a larger scale with Bank branches Only 8 respondents indicated that their Bank operated more than 101 Retail Bank branches What best describes the number of retail branches operated by the Bank?

11 11 The banks that responded operate far fewer mortgageonly branches than Retail Bank branches 11% of respondents indicated that they operated no standalone mortgage branches 50% of the respondents operate 10 or fewer standalone mortgage branches What best describes the number of retail mortgage offices operated by the Bank and/or its mortgage subsidiary?

12 12 Most of the bank respondents have Loan Officers who are expected to originate both bank referral loans as well as selfsource originations o Half (50%) of the respondents have Loan Officers who work out of an assigned retail bank branch and typically originate loans from BOTH retail bank branch referrals and other independent sources. o 34% have Loan Officers who work out of a retail mortgage office and typically originate loans from BOTH retail bank branch referrals and other independent sources. Which of the following best describes how retail mortgage originations are conducted across your organization? However, 39% of respondents have a more Independent model whereby Loan Officers work out of a retail mortgage office and typically originate loans from independent sources rather than nearby retail bank branches. o While the Loan Officers may get an occasional bank referral, the focus is on outside volume versus servicing the bank customer A. By mortgage specialists (LOs) who work out of an assigned retail bank branch and EXCLUSIVELY originate loans referred by one or more bank branches. B. By mortgage specialists (LOs) who work out of a retail mortgage office and typically originate loans from independent sources rather than nearby retail bank branches. C. By mortgage specialists (LOs) who work out of an assigned retail bank branch and typically originate loans from BOTH retail bank branch referrals and other independent sources. D. By mortgage specialists (LOs) who work out of a retail mortgage office and typically originate loans from BOTH retail bank branch referrals and other independent sources. E. By mortgage specialists (LOs) who are dedicated or focused on mortgage originations for wealth management and other important bank customers. F. By call-center LOs who typically cover mortgage leads sourced from the internet, direct marketing campaigns, customer retention efforts and leads from very small or remote retail bank branches.

13 13 In general, the Mortgage Division/Subsidiary is responsible for Loan Officer Compensation When the Loan Officer is expected to exclusively serve in-bank customers, the Retail Bank will pay the compensation of the sales person o 100% of the LOs who originate only Bank Referrals are compensated by the Bank o 50% of the LOs who originate from Wealth Management customers are paid by the Bank In cases where the Bank operate a more Independent-like model, the Mortgage Division/Subs are 100% responsible for LO compensation Which organization(s) pays for the compensation of each type of mortgage sales person?

14 14 82% of respondents expect the Retail Banking organization to provide mortgage referrals 13% of respondents do not expect any of the other Bank divisions to refer leads to mortgage Wealth Management and Commercial Lending are expected to send referrals by roughly 1/3 of the respondents. From which of the following bank business lines does the Bank s mortgage business expect significant referral of potential mortgage loans?

15 15 What types of incentives are credited to or paid to individuals, bank unit managers or bank units for referrals of mortgage loans to the mortgage unit? More than half of the lenders include a credit as part of the Bank personnel incentive plans The next most popular incentive structure is to pay a fixed dollar amount for closed loans (45%) followed by fixed dollar amount for a referral (21%)

16 16 What types of incentives are credited to or paid to individuals, bank unit managers or bank units for referrals of mortgage loans to the mortgage unit? Credited or Paid to Referring Individual Total Credited or Paid to Manager of Referring Unit # of Responses Credited to Referring Unit Fixed Dollar Amount for Loan Referral Fixed Dollar Amount for Loan Referral that closed % of Loan Amount for Loan Referral % of Loan Amount for Loan Referral that closed Credit that is part of incentive plan or formula Earnings or P&L Revenue for Loan Referral Earnings or P&L Revenue for Loan Referral that closed % of Total Respondents (38) Fixed Dollar Amount for Loan Referral 21% 0% 0% Fixed Dollar Amount for Loan Referral that closed 37% 0% 8% % of Loan Amount for Loan Referral 3% 3% 3% % of Loan Amount for Loan Referral that closed 5% 3% 8% Credit that is part of incentive plan or formula 29% 11% 13% Earnings or P&L Revenue for Loan Referral 0% 0% 0% Earnings or P&L Revenue for Loan Referral that closed 3% 3% 13%

17 17 If Banks have an incentive structure that includes an earnings or P&L revenue credit, it is credited to the referring unit versus to an individual or a manager. The credit is most likely to depend on Loan Size (57%) or Secondary Market execution (29%) It does not appear that revenue credits are being used to specifically incent LMI or CRA type loan referrals If you indicated that an earnings or P&L revenue credit is given for a referred loan that closes, which of the following factors affect the amount of the credit? Total Credited or Paid to Referring Individual Credited or Paid to Manager of Referring Unit Credited to Referring Unit # of Responses Loan Size Product Type Subject property is in LMI Census Tract Borrower is LMI Borrower Loan to be Sold in Secondary Market Loan to be Held in Portfolio % of Respondents who Indicated P&L Credit Loan Size 0% 0% 57% Product Type 0% 0% 14% Subject property is in LMI Census Tract 0% 0% 0% Borrower is LMI Borrower 0% 0% 0% Loan to be Sold in Secondary Market 0% 0% 29% Loan to be Held in Portfolio 0% 0% 29%

18 18 In only 30% of the companies does the mortgage company pay the earnings credit to the referring business This implies that most companies use the earnings credit as an incentive tool or scorecarding mechanism rather than adhering to a strict accounting approach Does the mortgage banking business unit experience reduced revenue in order to pay for any earnings credit to the referring business unit?

19 19 No clear trend as to the entity making incentive payments is evidenced by these responses If cash incentive payments for referred business are made to individuals or managers outside the mortgage business unit, what business unit makes such payments?

20 20 Only 28% of the respondents feel that their current structure and incentives are maximizing the referral potential to mortgage Only the companies who have LOs dedicated to Wealth Management customers feel that they are maximizing their referrals Respondents were asked to explain their answers and their comments are shown on the next set of slides. In your opinion, is the level of mortgage referral activity from other bank business units being maximized using the structure and incentives in place at your bank? Total # of Responses % of Respondents Yes No Yes No By mortgage specialists (LOs) who work out of an assigned retail bank branch and EXCLUSIVELY originate loans referred by one or more bank branches % 100% By mortgage specialists (LOs) who work out of a retail mortgage office and typically originate loans from independent sources rather than nearby retail bank branches % 79% By mortgage specialists (LOs) who work out of an assigned retail bank branch and typically originate loans from BOTH retail bank branch referrals and other independent sources % 72% By mortgage specialists (LOs) who work out of a retail mortgage office and typically originate loans from BOTH retail bank branch referrals and other independent sources % 75% By mortgage specialists (LOs) who are dedicated or focused on mortgage originations for wealth management and other important bank customers % 0% By call center LOs who typically cover mortgage leads sourced from the internet, direct marketing campaigns, customer retention efforts and leads from very small or remote retail bank branches % 70% Total % 72%

21 21 Comments by Yes Responders In your opinion, is the level of mortgage referral activity from other bank business units being maximized using the structure and incentives in place at your bank? We track branch referrals by branch, region for applications and closings. Banking Administration posts results by Retail Banking Branch and Region to all Branch Banking Personnel for comparison purposes. We recently instituted a HELOC program where Banking employees complete a 'Needs Form' with customer up front, and deliver lead to our Inside Sales Telephone Reps for completion of application. Referring employee is paid an incentive monthly for closed loan referrals A significant amount of business is derived from our internal partners within the bank. I think our current fixed amount fits our culture and intent. The % of referral activity is at a good level and continues to grow

22 22 Comments by No Responders In your opinion, is the level of mortgage referral activity from other bank business units being maximized using the structure and incentives in place at your bank? Incentive Plans We used to have a direct referral plan. Now employees receive credit towards work plan goals when they make a referral, but no longer a monetary bonus. While referrals haven't declined, they haven't picked up. Even when there were payments, there were still referral opportunities not being referred. There is no quality of referral component therefore bank branch personnel are rewarded to refer all potential borrowers We are one of many businesses that receive referrals for which bank branches receive 'points' credit Incentive level is too low to stimulate proactive participation. It should be tied into the referring unit s profitability and be part of an overall plan Incentive level is too low to stimulate proactive participation. There is no benefit to the retail banker to make a mortgage referral other than providing their client a service A cash incentive paid for every closing would be much better than our current annual bonus plan. If an incentive was paid to the referring banker, referrals should increase Incentive plan does not exist.

23 23 Comments by No Responders (cont d) In your opinion, is the level of mortgage referral activity from other bank business units being maximized using the structure and incentives in place at your bank? Bank Branch Structure The referral process works in a refinance environment when the consumer initiates the inquiry. During normal environments, other priorities keep the branch staff from seeking mortgage referrals. The only referrals we get are when customers ask about a mortgage loan. We are not actively soliciting our customers in the branches. We don't have a sales structure in place. Employees in the branches are busy working on their daily work and do not take the time to think about referrals to the mortgage department. We are just now beginning to focus on methods to increase referral activity from all business units. There is a lack of urgency amongst the other business lines, and the incentives aren't sufficient to make such activities a priority. Branch bank employees have an operational focus and not a sales focus. We receive very little in the way of mortgage referrals Tracking The Bank has not capitalized on the cross selling opportunities. The internal systems are an impediment to tracking referral loans and sources so it is done manually. Miscellaneous We are developing a more robust cross sell program to take advantage of the cross-sell opportunity We are actively growing our bank business unit referral channels. We seem to be on an Island where neither Retail Bank nor Commercial have a strong relationship with Mortgage. We are working to mend it but it truly was Mortgages fault in the first place. Our commercial lenders are better at referring mortgage clients. Our board members, President and Chief Lending Officer are good sources for mortgage referrals. We pay $50 per closed loan referred.

24 24 The vast majority of respondents (91%) account for mortgage banking activity separate from the Held for Investment Is the accounting for mortgage banking activity (producing, sale and servicing of loans) distinct from the accounting for the bank s investment in portfolio loans?

25 25 Noteworthy Additional Participant Comments Regarding Bank Accounting, Referral and Compensation Practices Most branch employees make little effort to send business to the mortgage department. The cost billed to Mortgage includes not only the flat incentive dollars paid to the individual, but also a token amount of revenue that gets credited to that person's branch. Mortgage does not get credit for selling loans to bank portfolio or servicing. The Mortgage division is credited with an internal 'gain' from the origination of a portfolio loan at the time of origination. Thereafter, the portfolio is accounted for under a Treasury function.

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