October 27, 2015
By Bob Coleman
Editor, SBA Hot Topic Tuesday
SBA Hot Topic Tuesday — What is a Fair % of 7(a) Secondary Market Premiums to Pay SBA BDO’s?
From the Survey.
First, thanks to the 100 plus who answered the survey.
The surprising result is 13% say SBA prohibits lender-employed BDOs to participate in secondary market premiums. Now, please note they are not necessarily wrong. SBA is silent on this issue. This will be an interesting discussion in the future.
Here are the results of the survey
As always, the open-ended responses give a good read of the pulse of the industry.
Here are some edited responses:
Any additional comments?
BDO cannot just get have the upside of the equation. If they get a piece of the premium or interest collected, they should get the downside of a charge off, lost of guaranty if any, cost of servicing… Giving the BDO a % of the premium disregards all the other people involved the SBA loan process from credit analysis, documentors, secondary market person who executes the loan sale and customer service.
BDO’s should always have a base salary since they have the network of clients to bring production.
I think the percentage of interest method in # 5 is reasonable, but the percentage used is too high.
I also think the interest spread should be taken into consideration instead of just gross interest
I fear that the high premiums are bringing too many green players into the field. When premiums drop- an inevitability, your last question will become an issue- BDO’s could find themselves on a “draw”. The salaries are also getting over heated right now- but I’m ok with it, and banks deserve it. They screwed BDO’s and laid them off in droves when things got tough. Banks should have sacrificed and kept their people during those tough times.
If you do not want Monkeys working for you you must pay them well
We pay approximately 10-12% of the premium on a sold loan and have yet formulated an incentive plan for loans that are not sold. I would think 5% of the interest collected every year for loans held on the books would be more palatable for our Bank.
Straight incentive with no salary creates too much pressure for the BDO to produce which can cause them to cut corners, stretch the truth, or blatantly commit fraud. Paying a % of the interest to the BDO is reasonable for unsold loans, however there should be a time limit, i.e. first 18 or 24 months (would depend on term of loan). What do you think about “claw-back” restrictions where if a loan goes into default in the first 12 or 18 months then the BDO has to payback the incentive (or a portion of it)?
It must be recognized that BDO pay plans are dependant upon the needs of the various banks/lenders they work for. Every lender/bank has its’ own mission, etc. The way each SBA department fits into that bank will drive behavior.
for #6 it could be an option, not a standard
Incentives that are too high can lead to too many bad loans. There needs to be a clawback provision.
If no salaries, then you are treating them as brokers. At that time premium splitting will be prohibited. You kind of stuck to make them employees, if you adopt premium comp
the keys are how active are the BDOs in closing the deal and what the source of the leads are. If they are all internal referrals then the incentive needs to be alot less.
market has come back strong for BDO’s over last 2 years as more banks see value of 7a loan volume and sales. Still a shortage of qualified BDO’s with bases more around $100M in the major SE markets for solid $8-$12MM volume.
There needs to be extra $ incentive to do the smaller (less than $350,000) loans. In addition, many Lenders are requiring holdbacks or reserves for defaults / prepayments.
I feel that incentive should be paid to BDOs but would like to see some of it deferred over the “out” years, and tied to the asset quality performance of their loans
The premium is a reflection of the way the loan is priced which gives the BDO an incentive to increase the pricing. At some point in the future these loans will come under the same scrutiny as residential loans which prohibits incentives being paid based on rate or any variable other that total production.
Too many variables to give any sense of accuracy to this survey. MAJOR NOTE: Can’t pay on sale of loan, but can use the proposed sale to calculate commission. Can’t have a policy that says paid only IF the loan is sold.
commission only BDO’s have been tried at various times by various lenders – its fraught with problems and is a bad choice – and speaks poorly of the bank’s willingness to commit to what is already an overcrowded and shrinking market.
There are other factors to consider too. For example, was the customer sourced internal or external? What happens if the loan fails? I have been on the management and the sales side so these things have to be worked out.
Everyone in the SBA business needs to understand that if compensation gets out of whack (too high), we run the risk of putting the future of the program in jeopardy. Think “killing the goose that lays the golden eggs”. Greed has no place in our program. Having said that, I do believe sales folks who are competent and not only source their deals but really work them, end to end, deserve to be fairly compensated.
Need to have clawbacks for early defaults and paid broker fees to reduce commissions.
Compensation skews behavior and leads to shoddy ethics and production of low quality loans. Are we destined to repeat recent history so soon?
There are a broad range of comp plans out there- if the BDO gets to share in the sale of the loan, do they also come to the table when the loan goes bad and the bank takes a loss?
Commissions incentivize production. If the production isn’t there, the BDO has to go.
Base Salary takes away pressure (see Maslow’s triangle). No pressure equates to better performance. If my BDO wins, then my bank’s performance is a double win. The fact is, everyone wants to do business with the guy (gal) who is doing well.
Credit quality is the first criteria. My experience is incentives on commercial business that is based too largely on quantity leads to some bad endings.
Our bank feels strongly that paying a percentage of fees,etc. Is not proper for any loan officer as it creates incentive to make Marginal loans. Fixed salary + bonus is best practice.
BDO compensation models which are strictly incentive based focus attention away from reasonably available & priced small businesses lending activities.
When a BDO’s salary is too heavily reliant on bonus pay, the quality of approved SBA loans suffers as they push through ‘bad’ loans. BDOs should be paid a fair base salary with bonuses determined not only by number of loans, dollar amount of loans, and secondary market premiums, but also by previously defaulted or liquidated loans from their portfolios. Overall salary needs to be more closely tied to portfolio performance than to brand new loans.
I don’t like the method suggested in question 5.
In question 6, I do not necessarily find it UNreasonable for BDOs to go straight commission, but I think it is unwise. I think what this topic is getting at is making a distinction between the role of a true Lender (BDO, versus the role of a broker. This dynamic has existed in the industry for at LEAST the past 20 years, and is not new. It will be interesting to see how this plays out in the current era of increasingly higher regulation. In my experience, a responsible BDO who is able to balance an understanding of credit risk with sales acumen is worth their weight in gold – it is almost impossible to pay them too much. Unfortunately, the higher premiums of the past few years have enabled the industry to chase (and overpay) mediocre talent. The problem ISN’T the compensation being paid to the true talent – what keeps me up at night are the Brokers masquerading as Bankers who don’t care what happens to the customer once the check clears. .
It all depends on the institution and where they are in the SBA life cycle. Building a new team and brand vs. established brand or mature SBA shop vs. online micro lender, community lender, etc…
If you’re a Bank, the FDIC will have a real problem with paying the BDO under this method. The OCC might be more liberal. We have been forbidden to pay the BDO more based on the interest spread.
BDO should have production bonuses, not secondary market sales %. They should have the salaries which is compensation to work existing portfolio and bonuses related to new loan production.
base plus incentive is fine as long as it is not too much. BDO’s need to understand that there is cost of funds and servicing costs.
Incentives given for volume lead to bad behaviors. Do not agree at all with premium splits.