What is Reasonable Loan Officer Compensation?

I get people asking me about how much their mortgage loan providers make, usually with an idea towards negotiating it down but often with the idea of choosing one loan or the other based upon the loan officer's compensation. This is a bad idea.

First off, there are several forms loan officer compensation takes. There is so-called "front end" compensation paid directly by borrowers. There is "back end" compensation paid by lenders, also known as yield spread. There are also volume incentives given by most lenders, and promotional give backs and offsets. Then there are times when the loan officers is holding out their hand for kickbacks behind your back or by "marking up" third party services that they order on your behalf. This is illegal, but it still happens. Trying to judge a loan by loan officer compensation is actually fairly difficult if they are trying to hide it.

Furthermore, it's actually a distraction from what is most important, namely, the best possible loan for you. For instance, a couple of weeks ago I was shopping a loan for a decidedly sub-prime prospect. The lowest quote I got enabled me to give a quote of a 7.25% retail rate at par, which is to say no points to the borrower. But that lender was better than half a percent better than their nearest competition because he fit neatly into one of their targeted niches. Had I merely not shopped that loan with that lender, the best I could have done would have been 7.8 percent at par, and one full point from the borrower would only have driven it down to 7.3 percent. Now suppose I didn't shop that one lender who gave me the best price, and my competition had found something even better, say a 7.00 percent par rate loan. For that particular loan, they could have made a full percent and a half of that loan amount more than I did, and still delivered a better loan for the client.

Now in point of fact, I actually beat my competition by quite a bit, and I was willing to guarantee my quote where they were not willing to guarantee theirs. But the point I was making is still valid. Judge the loan by the best loan for you: Type of loan, rate, and total cost in order to get that rate.

Furthermore, brokers and people who work at brokerages legally must disclose their company's compensation from other sources, while direct lenders do not. Direct lenders are making, if anything, more for the average loan than the brokerages, but because they do not have to disclose compensation not paid by the borrower, if you try to use loan officer compensation as a way of judging the value of the loan, the direct lender will look better than the broker for most loans. Until you go and compare the loans they actually were prepared to deliver from the most important perspective: What it means to you, the consumer. A 6 percent thirty year fixed rate loan with no pre-payment penalty that cost you a grand total of $3500 is a better loan than a 3/27 that has a pre-payment penalty, cost you $8700, and is at a rate of 6.25%, regardless of how much the respective loan officers or their companies made, or would have made. Loan Officer compensation is a distraction. Much more important is the loan they are willing and able to deliver, it's type, rate, costs, and whether or not there is a pre-payment penalty.

Caveat Emptor