NET BRANCH SURVIVAL KIT

The 25 most

important QUESTIONS

you must ASK about net

branching!

NET

 

BRANCH

 

SURVIVAL

 

KIT

 

1. WHAT IS A NET BRANCH?

In an industry where guideline compliance is so heavily scrutinized, it is vitally important to make sure that the net branch partner you choose is operating in accordance to HUD guidelines. There are both acceptable and unacceptable ways to conduct a net branch business, so it’s important to understand the differences between the two. We have observed many companies operating outside of HUD guidelines, and we caution anyone against partnering with a company who is either blatantly disregarding HUD guidelines or who is just unaware of the rules.

*HUD defines an acceptable net branch structure as:

“…a net branch arrangement is one wherein the branch manager's compensation is based upon the "net" profit of the branch.  The HUD/FHA approved mortgagee collects the revenue from the branch, pays the branch expenses, and then pays the branch manager the remaining revenues, if any, as a commission.  Such an arrangement is, essentially, an alternative compensation program for the branch manager and is an acceptable branch arrangement if all other branch requirements are met.

What are ‘other branch requirements’? Here are just a few of the requirements of the Net Branch relationship per HUD.

A Company is required to-

·          …Pay all of its operating expenses including the compensation of all employees of its main and branch offices.  Other operating expenses that must be paid by the HUD/FHA approved mortgagee include, but are not limited to, equipment, furniture, office rent, and other similar expenses incurred in operating a mortgage lending business.

A Company must not -

·         Require all contractual relationships with vendors such as leases, telephones, utilities, and advertising to be in the name of the "employee" (branch) and not in the name of the HUD/FHA approved mortgagee.

·         Require the "employee" (branch) to issue a personal check to cover operating expenses if funds are not available from an operating account.

·         Require the "employee" (branch) to indemnify the HUD/FHA approved mortgagee if it incurs damages from any apparent, express, or implied agency representation by or through the “employee's" (branch's) actions.

*(Source: HUD Mortgagee Letter 00-15)

2. HOW CAN I COMPARE DIFFERING LEVELS OF BRANCH SUPPORT?

When comparing various support levels, it is important to remember that support is one of the easiest claims to make, yet one of the most difficult and expensive to deliver.  The key to comparing radically different levels of support lies in asking the right questions. The questions in this special report were developed with this challenge in mind.

 3. WHICH PAY PLAN IS BEST FOR ME?

Smoke and mirrors can make certain compensation packages look more attractive than others, so let’s try to remove those advertising distractions and marketing gymnastics to get to the bottom of this very important issue.

It is important to discover how the corporate entity makes its money as well as their motivations to make money – Is it to grow your branch or to grow many more branches like yours? Let’s take a look at the two most common compensation structures:

FLAT FEE PER MONTH V/S FLAT FEE PER FILE

It’s important to keep in mind the motivations of your business partner. Do they benefit or profit when you are making money, or when you aren’t? And are they motivated to support you? In order for you to be successful, your interests must be perfectly aligned with those of your business partner. This means that the company must be incentivized to do all it can to ensure your success. The chart below outlines the the key components of both structures.   

As you can see from the chart above, Flat Fee Per Month programs represent the worst overall value for loan originators and branch managers. It appears that the primary goal of companies which offer flat fee per month programs are to set up as many shops as possible and plan for a high degree of turnover. Furthermore, they are financially motivated to decrease critical support, training, and technology offerings, as these are viewed as expendable overhead.

“If the company is receiving a flat fee per month, then they have a very low motivation to support you, and they will be less likely to help you reach your next level. In fact, as you produce more, you become a greater cost to them!”

On the other hand, Flat Fee Per File structures perfectly align the interests of the company with its branches and partners. Most companies which utilize flat monthly fees often find that they have to increase their fees in order to keep up with rising overhead, which means even less money to you.

4. IS AN INTERNAL LENDING LINE MORE ADVANTAGEOUS TO ME?

Internal lending lines usually represent a lower value proposition for the branch managers and loan originators. Although they represent a greater profit structure for the company, the higher pricing usually puts the managers and originators at a competitive disadvantage. Generally, companies that have internal lines charge fees to discourage the use of an outside lender. This means that you will be either forced to sell at a higher rate and make less money, or you will be penalized for offering your clients the best rates on the market.

5. HOW DOES COMPLIANCE AFFECT ME?

Everyone, even loan officers, can be subject to criminal and civil penalties for non-compliance.  This is why it is so important to choose a partner who places the highest value on compliance, and who keeps loan officers up to date on the ever changing world of compliance.   

In an average sized mortgage shop, this is easily a full time job for one to two people.  The complexity of understanding state and federal guidelines for conforming in government products is a constantly moving target, not to mention the communication and training necessary for all employees every time there is a change.  When shopping for a net branch partner, it is important to discover whether or not each company has the resources and the motivation to constantly produce the most up to date compliance how-to guides.  

6. SHOULD I HAVE TO PAY ANY UPFRONT FEES?

No, a net branch operation falls under the responsibility of the corporate entity and, per HUD guidelines, must be a true satellite office of the corporation.  Any net branching company which attempts to charge you upfront fees may be violating HUD guidelines, and therefore we recommend that you investigate that particular company thoroughly.  A net branch operation is an employment arrangement, and legal arrangements don’t require upfront fees.