Mortgage loan officers typically get paid 1% of the total loan amount. We explore the reasons why loan officer commission is bad for consumers. And we offer an alternative — Better Mortgage has loan officers who don’t get paid commission, ever.
Loan officers are the main point of contact for borrowers throughout the mortgage application process at almost every mortgage lender. That’s an important job, right?
In return for this service, the typical loan officer is paid 1% of the loan amount in commission. On a $500,000 loan, that’s a commission of $5,000. Many banks pass this cost through to consumers by charging higher interest rates and origination fees.
We think it’s crazy that consumers are effectively charged to pay loan officers who may not be representing their best interests. That’s why at Better, we don’t pay our loan officers any commission, period. Instead we pass on the savings to consumers via industry-leading rates, and we invest in technology to make the customer experience faster more transparent, and a whole lot better. In this article, we’ll explain why.
1. Your own best interest
It’s fair for consumers to question whether mortgage loan officers are acting in their best interests. A useful starting point is to ask: How are these loan officers compensated?
Loan officers typically get paid in two ways:
1. Commission, calculated as a percentage of the total loan amount
2. Incentives for selling certain financial products or reaching quotas
Both sources of compensation can create a conflict of interest.
Let’s think about commission. Since it’s a percentage of the total loan amount, the bigger the loan they sell you, the bigger the commission. This issue played itself out for years leading up to the 2008 subprime mortgage crisis. Banks and mortgage brokers aggressively pushed mortgages that borrowers couldn’t afford, while loan officers got paid handsomely to intermediate. If you’ve seen the 2015 film The Big Short, you’ll be familiar with this scenario.
Mortgage brokers in The Big Short
Mortgage brokers in The Big Short
In the case of sales incentives, you’ve probably seen news that Wells Fargo was ordered to pay over $185 million “to resolve allegations that the bank’s sales quotas and incentives pushed employees to open millions of unauthorized accounts” and now faces an inquiry by the U.S. Department of Justice. While this case does not involve mortgages, it clearly demonstrates the problem with sales incentives.
What happened is this — the company set very aggressive goals to cross-sell other Wells Fargo products. For example, bank employees who cross-sold a certain number of checking accounts received incentive pay. To cash in on these incentives, over 5,300 employees set up more than 2 million fake accounts without customer consent. Customers got duped, the employees got fired, and Wells Fargo got in serious trouble.
It’s clear that both commission and incentives are horrible at aligning a loan officer’s interests with your own. To avoid any such conflicts, Better pays loan officers a fair salary with no commission. Our staff offers support, not sales, to ensure alignment with your best interest.
2. The best tools for the job
While technology has made financial services more efficient overall, mortgage banks in particular haven’t kept pace. What other reason could there be why so many lenders rely on physical paper and fax machines to share information?
Using antiquated tools is not only slow and annoying, it’s also a failure to use the best tools for the job. Making even a single loan involves handling huge amounts of data, performing complex calculations, and validating thousands of rules. Compared to human loan officers, computers are orders of magnitude faster, more accurate, and more efficient at doing these things.
We don’t fully agree that loan officer jobs should be automated. We believe:
- Computer systems should do the calculations.
- Borrowers should have direct, transparent access to these systems.
- Human loan officers should be available to offer support and expert guidance to borrowers — provided they aren’t being paid commission that skews their interests.
3. The ever-increasing cost of financial intermediaries
Loan officer commissions are a perfect example of a larger, systemic problem of financial intermediation, whereby banks and financial institutions charge for the service of connecting consumers with their products.
Financial institutions have continued to charge more and more over the last 30+ years, despite technology advances that have drastically increased the efficiency of financial transactions. According to a 2012 paper that examines why financial services are so expensive2, total compensation of financial intermediaries exceeded an incredible 9% of GDP. After a decline correlating to the financial crisis in 2008-9, it has been climbing again toward 9%.
By creating systems to match consumers to the right mortgage products, and providing consumers with direct access to these systems — we can reduce the reliance on costly intermediaries.
4. Disintermediation is possible
Unrelated to mortgages, the investment management industry has provided an interesting example of how financial disintermediation is possible through innovation. “Index funds” were first introduced in the 1970s. As opposed to the traditional model of human fund managers being paid to actively choose investments (typically charging 1% of assets under management), index funds simply track and invest in entire markets like the S&P 500 (for fees as low as 0.05% of assets).
Not only do index funds cost significantly less — they usually outperform their actively managed fund counterparts. SPIVA (short for S&P Indices Versus Active) is a bi-annual scorecard that measures the performance of actively managed funds against their relevant S&P indices.
According to the SPIVA scorecard for mid-year 2016, 85% of large-cap managers, 88% of mid-cap managers, and 89% of small-cap managers underperformed relative to the S&P indices over the previous one-year period. The report states, “the figures are equally unfavorable when viewed over longer-term investment horizons” with similar gaps over the five- and ten-year investment periods.
The passive fund management strategy has been so successful that equity index funds have grown to account for 34% of market share3.
Index funds have reached this level of popularity due to consumers choosing this form of disintermediated investing, which provides both higher returns and lower fees.
It’s a good reminder that educated consumers can seek out other disintermediated financial services (such as mortgages), as well.
5. You can do better
We’ve established four reasons why it’s bulls#!t for you to get stuck with higher rates and origination fees to effectively pay for loan officer commission. But the very best reason is — you don’t have to.
You can choose to work with Better. We have industry-leading rates. We don’t charge origination fees. And our loan officers don’t get paid commission, ever.
As a Better borrower, you can complete your entire digital mortgage process online. You have direct access to our systems, which:
- Match you to the largest mortgage end investors in the world (including Fannie Mae).
- Find the best mortgage at the lowest rate for your specific situation.
- Guide you through the application process with 100% transparency.
Our loan officers are here to support you with any questions or concerns you may have (which is what humans are actually good at). But they don’t get paid commission. You deserve better than that.
Frey, Carl Benedikt and Osborne, Michael A. (2013), "The Future of Employment: How Susceptible Are Jobs to Computerisation?" ↩
Philippon, Thomas, “Finance vs. Wal-Mart: Why are Financial Services so Expensive?” ↩
Bogle, John (2016), "The Index Mutual Fund: 40 Years of Growth, Change, and Challenge" ↩
Erik Bernhardsson & Kristen Connor
Erik Bernhardsson is CTO at Better and was previously Head of Machine Learning at Spotify. Kristen Connor is Head of Customer Experience at Better and was previously VP of UX at Yodle.