How a Loan Officer Makes Money

Granted a loan officer job's is to help the client-borrower find the right lending product, establish the applicable rates and payment schedule, and ensure the client-borrower is able to make good on their promise to repay the loan.

However, as is true with any profession, the loan officer is also out to earn themselves a decent living. Apart from a salary drawn as being an employee of a bank or some other type of financial institution, the loan officer also has a variety of incentives for acquiring compensation.

Loan Officer: Forms of Compensation

While a loan officer may earn a traditional base salary, due to the variety of earning incentive programs available, they have the opportunity to earn a great deal over and above that of their base salary.
Earnings Structures and Incentive Structures

Because many banks and financial institutions believe a good incentive program can both tremendously improve sales results and motivate the lending team, they offer a range of differing incentive programs, all of which have a common goal to improve the ROA, return on assets.

Front End Compensation. This is an additional fee paid in the initial stages of the loan process by the borrower. Along with covering the time and efforts of the loan officer, a percentage of the front end compensation also reverts back to the loan officer's firm or affiliation as a condition of the loan officer's working relationship status. This is a favorable form because it is upfront with the fees calculated into the borrower's initial payment.

Back End Compensation. This compensation refers to the debt-to-income ratio calculated using principal, interest, taxes, insurance, and consumer credit obligations divided by gross monthly income. It is expressed as a percentage.

A flat, per-file incentive. This is the standard amount associated with each originated loan, and allows the loan officer to know the amount although it does not encourage them to sell the borrower on a higher loan amount.

Percentage of the Average Yield/Yield Spread Premium. This is the percentage of the total loan amount paid to the loan officer for charging a higher than average interest rate. Often referred to as a rebate, this rate is expressed as a percentage, also referred to as "points". Conversely, on rates below the par rate, lenders charge such fees to the borrower. This type of incentive structure ensures loan officers do not attempt to go down too low on the rate they offer to borrowers. The yield spread premium (YSP) then is the fee paid by the lender to the broker solely in compensation for signing a higher rate loan.

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The problem that can arise within this incentive scenario is that as a way of getting more of a kick-back, loan officers may try to sell at a higher rate, something which is not in the best interest of the borrower.

Note: Banks do not have to disclose the yield (profit) they make on your loan; however brokers do need to disclose the yield spread premium.

Net loan growth with a tiered structure. In this structure loan officers receive increased levels of bonuses based upon higher levels of growth. While this method is often perceived as highly motivating, sometimes a team can have a very good month in terms of loans closed, but due to external add-in costs, only small amounts of growth may be visible, an outcome which can prove demotivating.

Percent of the total loans booked for the month with a tiered structure. Paying higher amounts to loan officers for higher volumes, allows target quantities to be set and reset based upon changed strategies and priorities. Different target goals can be set for varying loan products and based on economic and other factors; the bar can be lowered and raised accordingly.

Loan Origination. This is paid out in differing time frequencies based upon the individual financial forum; the commission percentage tends to be based upon the type of loan that has been closed. For example, larger, more equity generating loans, for example, jumbo loans, tend to derive larger percentages (upwards of 60%) back to the loan officer whereas smaller loans offer lower percentage incentives (like 40%).

Loan Volume Bonus. The volume bonus is usually remunerated on a monthly basis, once the loan officer has reached a certain dollar amount (such as one million dollars in loan originations). This form of incentive offers a bonus percentage (for instance, 25%) on each loan generated thereafter during the stipulated annual period.

Referrals. Typically, financial institutions pay out a set fee to loan officers who may make referral incentives for loans but are not the ones to actually originate the loan. Such payments tend to be paid out once a month and while usually half that of loan origination incentives they prove to be a welcome kick-back for what proved to be a small amount of the loan officer's time.

All in all…best practices for loan officer incentives combine:

· Information to show loan officers where to direct their focus.

· System to empower loan officers to evaluate what if scenarios.

· Incentive structure based upon loan officers' total contribution to the bank. Under such, the loan officer is specifically rewarded to achieve bank goals and maximize long term profits.

· Incentive structure with appropriate allowances whereby loan officers and their banks of affiliation share negative setbacks and are aligned to go forward.

· Hybrid, a quarterly or annual incentive structure.

The more sophisticated and savvy the loan officer is at their job, the better they are likely to structure loans with good compensation, bring in new clientele for various offerings and services, and contribute to achieving the overall goals set by the financial institution of which they are a member.