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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2017

Growth Often Requires Change

Small independent mortgage companies can benefit from 'nesting' inside a large lender

Growth Often Requires Change

Small, independent mortgage companies encounter a cruel set of consequences when they succeed. As they continue to produce and build a strong reputation, their business begins to grow. This growth in turn requires additional staff, tools and resources, all of which require more money and more time. They must also make an adequate investment in compliance, systems and processes all while maintaining net worth requirements for warehouse lines.

Soon, employees at all levels are pitching in to help address administrative duties, impeding their ability to close loans and generate revenue for the company to their fullest potential. At a certain point, growth is no longer sustainable for these businesses. These small companies eventually reach the point where they simply cannot work any more loans into their pipelines and, like Russian nesting dolls, need to find a partner lender that is a good fit.

Fortunately for small mortgage companies that have outgrown their own productivity, a solution does exist: Aligning with — or moving their business to — a direct lender.

This move could take a number of forms, but aligning with a large, direct lender that has sound internal processes, dedicated support tools and resources, and adequate financial backing can help alleviate some of the burdens faced by these small companies. Of course, this transition can mean giving up some autonomy and independence.

Still, by aligning with a large, trusted lender to address regulatory, administrative and financial obstacles, owners of small mortgage companies — and the loan originators and staff they employ — can gain a new sense of freedom.

Adapting to complexity

One of the many challenges facing small, independent mortgage companies is the industry’s evolving regulatory landscape. Recent years have brought an onslaught of new regulations, rules and requirements that must be followed. Changes have added complexity to many aspects of the business, affecting marketing and networking initiatives, disclosure requirements and data-collection and reporting practices. 

Failure to comply with the numerous regulations can result in steep fines, but the costs associated with ensuring compliance and avoiding such fines also is considerable, causing some companies to take calculated risks. Aligning with a larger lender serves to mitigate this risk for small, independent companies — without incurring any additional costs.

One of the many challenges facing small, independent mortgage companies is the industry’s evolving regulatory landscape.

When considering a transition, therefore, a demonstrated commitment to compliance should be a key consideration. A large lender with its own dedicated compliance department should be able to stay abreast of — and adapt quickly to — regulatory changes without any lapse in business operations.

Access to clear policies and procedures and specialized teams to oversee processes like marketing reviews and disclosures will benefit originators as well. The added layer of protection will allow them to conduct their business with more confidence.

Gaining admin support

As with any business, when a mortgage company grows, the scope of administrative duties also increases. One drawback to the control afforded by independence is how quickly owners can get bogged down with essential but laborious tasks.

Eventually they are faced with the decision between trying to juggle these responsibilities in-house or outsourcing them to a third party, often at an enormous cost. A large lender with a robust operational and support structure can relieve an owner of these tasks while keeping all processes centralized.

Growth inevitably includes hiring additional staff, and a large lender with a dedicated human resources department can handle the related tasks and offer more competitive benefits packages to its employees than smaller, independent companies can afford. A central accounting department can manage employee compensation, and also can relieve the independent owner of managing payments for third-party services, forecasting, budgeting and other accounting functions required to run a successful business.

Liking the people you work with is important for job satisfaction, but trust is paramount for business relationships.

Another critical function that owners of independent mortgage companies must consider is information technology (IT) and security. Data breaches pose a serious threat when consumers’ sensitive financial information is involved. A large lender with an in-house IT department dedicated to ensuring that appropriate systems and safeguards are in place can provide more peace of mind to its affiliates, the originators who work with them and borrowers. Moreover, system issues and interruptions can be remedied more quickly than if the service was outsourced.

Finally, marketing tasks also add to the already-full administrative load shouldered by independent owners. A sound marketing strategy can ultimately help grow a business, but creating and executing the strategy takes a great deal of time and talent, and outsourcing to an agency can cost tens of thousands of dollars. A large lender that has an internal marketing department with its own budget can alleviate this burden by providing creative support, platforms, tools and technology that help originators increase their production.

Assuming financial exposure

Remaining compliant and dealing with administrative tasks can quickly erode an independent mortgage company’s revenue all while owners are forced to address increasing net worth requirements. Not only might these owners find themselves unable to keep all the money they earn, they also may be forced into making personal guaranties to maintain warehouse lines and aggregator relationships.

This level of personal exposure has the potential to be financially devastating. Many owners of small, independent mortgage companies work for years to build their personal and company’s net worth, only to see it evaporate in an instant as a result of repurchase demands or unwarranted litigation.

Reducing personal financial exposure and liability might be one of the most compelling reasons for owners of small, independent mortgage companies to consider aligning with a larger, direct lender. A large lender with robust, reliable financial backing can take on the warehouse line and correspondent relationships and absorb repurchase risk that once fell solely on the independent owner. This frees up owners to get back to focusing on their own production, and actually keeping the money they earn.

Making the right transition

The strains of industry compliance, administrative duties and financial obligations may seem like surmountable challenges for owners of small mortgage companies when they start out. But, with growth, life can suddenly become more complicated. Soon, producing owners find themselves consumed by the business they once desired. Fortunately, the weight of this responsibility is escapable, but not without some sacrifice.

When owners of independent mortgage companies begin to entertain the idea of transitioning their teams to a larger lender, a certain level of apprehension is inevitable. By joining another established company, owners may feel they are losing a piece of their identity. They may wonder if it’s worth relinquishing their control — their freedom. More important questions for these owners to consider, perhaps, are the following: Are they really free anymore? Are they still doing what they love every day? Are they able to sustain their paychecks?

The decision to transition is not one that any business owner takes lightly. Of course the new company must have the necessary products, services and infrastructure in place to make the change worthwhile. The truth is that many large lenders have similar offerings in this regard. What sets apart a truly great opportunity, however, is the company’s culture and its people.

One essential factor when choosing a company to align with is trust. Liking the people you work with is important for job satisfaction, but trust is paramount for business relationships. One of the best ways to gauge trust is through face-to-face interaction. While technology has made it much easier to communicate over great distances, nothing can replicate the value of an in-person meeting where both parties can get a better sense of their compatibility.

Having an opportunity to meet multiple key decisionmakers also gives an owner a better understanding of the company’s broader culture. It can provide insight as to whether independence is understood and supported by the new partner, if new ideas are encouraged and, ultimately, if the large lender is managed by likeminded individuals who share the same ideals and vision as the independent owner. Once this harmony is found, alignment becomes less arduous and producing owners find they are one step closer to increasing the size of their business without losing the love of their craft.


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