Mortgage brokers have been carping for a couple of years now that they’re being treated as though this was India and they were Untouchables. It’s true that loan originators at banks seemed to be getting all the breaks. But now those bank LOs are beginning to feel like they’re swiftly sliding down the caste system, too. It’s even possible they’re going to land at a new bottom.

The latest kick in the shin comes from the U.S. District Court in Washington, D.C. There, a federal judge has ruled that the U.S. Department of Labor is within its rights to classify bank loan officers as non-exempt employees, who qualify for overtime pay.

For years, the DOL took a different tack. It viewed bank mortgage originators as largely administrative employees – shuffling paperwork and educating consumers on fees and interest rates. But in 2010, the regulator abruptly shifted course. It instead said that since originators were primarily tasked with originating mortgages, the people doing the jobs weren’t administrators, they were salespeople. Overnight, the rules changed. The Mortgage Bankers Association of America sued, and lost.

This is important, because it fully gets to the nature of compensation for bank loan originators. It’s also going to make it much harder for banks to justify hanging onto and training marginal or new talent.

In essence, we’re going to see wads of bank mortgage originators getting fired.

Yes, banks have branches with set hours. But many of those branches just take in leads for originators. Those salespeople often then need to go meet with prospective borrowers. These are often couples, who meet with the bank personnel in the evenings when both are home from work. Often, it’s at their own home. These loan officers, then, are frequently working long, odd hours to get the job done.

But banks, like just about all employers, are loath to rack up the overtime dollars. So they’re going to start looking at loan originators and giving them the evil eye to get more productive, in less time. Those who don’t are going to get the heave ho.

The situation is also exacerbated by another Department of Labor ruling that banks have to pay their originators more than just commission; these workers are due at least minimum wage. That doesn’t sound egregious. But one prominent mortgage leader at a bank here in New England was blunt about it: “It used to be that we would hold on to people for a while, especially if they showed promise, and especially if the market was slow. We could work with them, and help them get better, because it didn’t cost us anything. Now, as soon as production falters, we’ve got to get rid of them. We can’t afford to be paying even minimum wage.”

Change Of Fortune

When public and regulatory wrath came down, unfairly, on the mortgage brokerage community, bank originators at the time had a little snigger. Independent brokers with independent loan originators had to pass all sorts of new tests, including special evaluations of financial soundness, an initial 20-hour education course and test, eight hours of continuing education annually and criminal checks, to boot. Originators working at banks, inexplicably, didn’t have to deal with any of that.

Naturally, lots of originators wound up working at banks.

But suddenly, their prospects at banks aren’t looking quite so sunny. Sales people often have dry spells – even the best ones – and mortgage lending doesn’t give originators a big book of repeat business. They’ve got to be hustling for new business all the time. And doing that takes time – time the banks don’t want to pay for. While the very best bank originators may be fine, anyone a step or two below that, folks who might otherwise be looked at as solid-if-erratic producers, is suddenly a significant liability. They may need to go find a job somewhere else.

But where? If they turn to other banks, they’ll have the same measurement used against them. The only place they could turn to make a reasonable living (especially with a market that’s heating up again) is to be an originator for a mortgage brokerage.

Here, however, they’ve now got to deal with the Consumer Financial Protection Bureau. Before the CFPB got rolling, regulators were letting bank LOs go to work for private mortgage firms while those LOs took all the educational and other steps to obtain their license. The regulators called this a “transitional license.”

But this spring, the CFPB snorted in derision at such an idea, and has decreed that there is no such thing as a transitional license. That means that, if bank LOs want to have any chance of ever getting a mortgage originator job outside a bank, they’ve got to voluntarily and proactively comply with all the same licensing burdens that mortgage brokers do. If not, and they find themselves canned by the bank for any reason, they’ll be sitting on the sidelines for a good long time.

Meanwhile, there’s another potential scenario that’s getting increasingly more likely the more the Department of Labor squeezes. Banks have an unbalanced compensation system for their originators being foisted upon them, because those originators are employees of the bank. But at most brokerages, the LOs are independent contractors, and aren’t bound by the same employer/employee strictures.

So it’s not unlikely that within a year or so we might actually see a bank outsource its residential mortgage originations to an independent brokerage, effectively turning community banks into mini wholesalers.

This isn’t just a matter of pay, after all. It’s a matter of payback.

Vincent Michael Valvo is CEO of Agility Resources Group LLC. He can be reached at vvalvo@agilityresourcesgroup.com.