Overtime and Originators--Recent Changes. How will you adjust your compensation plans?
The overtime regulations have changed once again, causing unique challenges to the mortgage lending business. Here's what you need to know and some of our thoughts.
Okay ... what do I need to know if I have mortgage originators regarding whether to pay them overtime?
Basics
As a general rule, every employee in the U.S. must get overtime pay (forcing you to decide whether to pay them or limit to 40-hour weeks). Fortunately, there are several exceptions (if employee qualifies as one of any, they are not entitled to overtime) the two most typical are:
Outside Sales - A loan officer with a primary duty of making sales and is customarily and regularly engaged in doing so away from the office qualifies as "outside sales." Here, if you have a loan officer who spends a lot of time at the branch, they shouldn't qualify. Problematically, "office" includes any home office. With loan officers relying more on phone and internet to communicate with borrowers, they're less likely to be out visiting people and, therefore, less likely to qualify as outside sales.
Administrative- **This is what has recently changed** Under this exception, a loan officer is exempt from overtime if she (a) gets a base salary of $455 per week, (b) whose primary duty is the performance of office or non-manual work directly related to the management or general business operations, and (c) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Problems with Overtime & Originators
Why don't we want to track with and pay overtime to originators? It's tough to tell where work ends and personal time begins--the originator is volunteering at a little league game when another parent comes over to talk about a refinance. Is the originator going to stop and write this down? If not, will they remember? Even if they do, managers have to have a lot of trust in originators to be doing this honestly.
Why don't we want to limit originators to 40-hour weeks? Loan officers living on commissions won't be pleased with this. We don't want customer service and we want them out doing everything possible to get deals in. ... that's why you see loan officers meeting borrowers late at night (after the borrower is off work). Limiting them to a typical 40-hour week is a lose-lose situation.
Closer look at the "Administrative" Exception (Affected by the 2015 Court Opinion)
To summarize- In 2006 the Depart. of Labor (DOL) said mortgage originators are generally exempt under "administrative". In 2010, the DOL changed its mind and said they are generally not exempt! Then a federal court forced the DOL to go back to using the 2006 opinion. And now, just a week or so ago, the Supreme Court overruled the federal court and forced the DOL to go back to 2010!
So we're stuck with the 2010 DOL opinion, available here, that basically says most mortgage originators must either qualify as outside sales (which can be tough) or be paid overtime.
What are your options?
1-Outside Sales and Others
Keep in mind there are other exceptions to the overtime requirements. Your originators can still qualify as "outside sales," for example. There is also an "executive" exception that some could fall under.
2-Track & Pay overtime
As bad as it sounds, this doesn't have to fundamentally change your mortgage banking strategy--we don't actually see it as so terrible a problem. Have originators submit time ... if you're concerned, maybe limit them to say 10 hours/week overtime. You'll have to pay them an hourly wage, but you can still keep them heavily incentivized.
Note: One thing that comes up with clients is how to calculate overtime pay. It's not just based on hourly rate. It also includes a percentage of your past commissions. No need to get too detailed, just make sure to be careful here.
Note: Other Upcoming Overtime Changes
In a move that may affect more employees than just mortgage originators, the government is expected to change other parts of the overtime rule soon. The base salary rate for some exceptions (see above), which is now $23,600, may be bumped up as high as $40,00,
$50,000, or more. In other words, if you have an employee earning
$35,000 that you consider exempt from overtime, you may need to start tracking and paying overtime unless their salary is increased to the new, higher, threshold.
In other news:
The number of community banks is quickly declining. Why? This paper from March 2015 (Richmond Fed) argues one major factor is that there are no longer any new banks. From 1990 to 2010 the average number of new banks per year has fallen from 100 to 3!
What if all banks under $10 billion were exempt from new and existing regulations? Would that help? Maybe! Well that's exactly what former FDIC chairman Sheila Blair has proposed in what they're calling the Sheila Blair Small Bank Regulatory Relief Act of 2015. She says this would "give regulators the ability to craft much simpler rules for banks with much simpler business models." Don't worry though, we have Massachusetts' own Senator Warren to fight back against that, just recently arguing that community banks don't need regulatory relief because "their profitability seems to suggest they're doing better than ever after the [Dodd-Frank] regulations went into effect."
Everyone is concerned that LOS providers won't have updates ready in time to test (train) employees on the TILA-RESPA Integrated Disclosures Rule. But don't forget to have your own testing center ready when your LOS update is released ... you don't want to be testing loan products that you no longer offer and loan data from 10 years ago. This is part of our TRID implementation support for clients, but reach out to my colleague Paul Bates, PBates@SCApartnering.com if you just want to run some questions by him ... and if you want to see all the ways SCA can make TRID a little easier, here's a summary.
Peter Sims talks about innovation strategies in his book "Little Bets. How Breakthrough Ideas Emerge From Small Discoveries" 2011. He argues that good entrepreneurs don't bet the farm every time, but are always taking small risks in search of good ideas - learning from mistakes made in a relentless effort to improve. Every business needs to innovate. Mortgage lending included (despite regulatory efforts to stifle it!) and definitely our consulting business.
Sims makes an interesting point that we're discouraged from having this experimental approach since childhood. Education is heavy on memorization and left-brain analytical skills. We're penalized for getting answers wrong and not rewarded for learning from mistakes and given little opportunity to form our own experiments. Sir Ken Robinson is quoted as saying, "We are educating people out of their creativity."
The book offers up a 6-stage approach (ironic that being innovative results from following this linear process) to breaking this cycle and encouraging innovation in your company, many of which I see John Spillane encourage at our company:
Experiment. Learn by doing and "fail quickly to learn fast."
Play. A humorous atmosphere "quiets our inhibitions when ideas are incubating ... and prevents creative ideas from being snuffed out or prematurely judged." Anybody who knows John or Steve must know that we have fun at SCA!
Immerse. Take time to "absorb how things work from the ground up." John is always encouraging us to get out and meet clients, ask questions, work to understand what issues they're facing because "if it's a problem for one client, it will be a problem for others."
Define. Identify specific problems throughout this process.
Reorient. Be quick to pivot and adjust goals based on new information. So many times we've had a great idea, gotten some new information, and then adjusted appropriately. That's the benefit of a small company. But it's also the benefit of "little bets" ... big companies tend to make bigger bets, making it harder to adjust as necessary and becoming something like "an aircraft carrier that struggles to maneuver amid increasingly choppy waters."
Iterate. "Repeat, refine, and test frequently armed with better insights [and] information."
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."
- Aristotle
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