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The Cooperative Relationship of Lenders and Brokers

“As you consider co-op possibilities, remember that what may be a huge advertising expense for a mortgage broker, is often very small change to a large mortgage wholesaler.”

Co-op marketing dollars could make the difference between having a bad year and a great year for some mortgage brokers. No one knows the exact amount, but corporate America allocates billions of dollars each year for co-op marketing. According to Roger Vickery, president of the National Association for Promotional and Advertising Allowances, Inc. (NAPAA), anywhere from $40 to $100 billion is budgeted annually by manufacturers and other large organizations for cooperative advertising support programs. Even though it can help both mortgage brokers and lenders, co-op marketing between the two has not been widely embraced in the mortgage industry. Why doesn’t the mortgage industry recognize the “win-win” proposition that co-op marketing and advertising provide? Will co-op advertising become a standard part of doing business in the future? Most importantly, how can mortgage brokers get a share of this money?

Background
The origins of co-op marketing in the United States go back at least 100 years, when retailers received advertising support from clothing manufacturers. Many co-op marketing practices were simply schemes designed to fix prices for various products. In 1936, Congress passed the Robinson-Patman Act, which defines how cooperative advertising and other promotional allowance programs can be executed fairly. The Federal Trade Commission (FTC) is responsible for the enforcement of co-op marketing laws and continues to monitor how programs are used in various industries. The FTC publishes a wealth of information on co-op marketing. The Guides for Advertising Allowances and Other Merchandising Payments and Services are of special interest. These guides include detailed information on applicability of the law, seller definitions, customer definitions, competing customer definitions, interstate commerce issues, and most importantly, the need for a written and well-defined co-op marketing plan. Generally, the primary difference between a legitimate co-op program and a price fix, or “kickback” system, is that the party providing the plan publishes a written co-op marketing document, that makes payments or services functionally available to all competing parties on proportionally equal terms. For the mortgage industry, FTC requirements dictate that in order for lenders to provide co-op advertising dollars to one broker, they must also offer the same program to all other qualified mortgage brokers (essentially, those that are certified to do business with the lender).

Clearly, the burden is on mortgage brokers to get the best wholesalers interested in better marketing support and clear-cut co-op programs. Fortunately there are plenty of resources to help the various parties in the mortgage industry develop new ways to work together. The NAPAA is a non-profit trade organization whose mission is education, and it has resources for all types of business organizations. “Traditionally, manufacturers have recognized they have the expertise to create outstanding products, but not the resources available to deal with customers directly,” said Roger Vickery, association president. “They need retailers for their distribution channel,” he noted.

“In the consumer market especially, by giving the retailer (or in this case the mortgage originator) incentives, it works out really well for both parties, as well as for the consumer. It extends the retailer’s advertising budget and helps the manufacturer’s presence in the retail marketplace,” he added. “Today we’ve leaped way beyond the initial concept of a 50-50 split of advertising costs. Over the past 20 years, we’ve seen the growth of what’s called a Market Development Fund. It’s the same thing as co-op, but it is generally a negotiated funding between the wholesaler and the broker that enables brokers to develop custom programs to meet their specific needs,” Vickery explained. He added, “Wholesalers can’t treat any mortgage broker unfairly or inequitably. If you give allowances to one broker, you have to be prepared to give an equitable amount to a competing (qualified) broker. It doesn’t have to be the same program – one organization may need help with advertising, another with seminars – but the value has to be the same.”

Key Barriers
Why doesn’t every mortgage wholesaler offer cooperative programs to brokers and correspondent lenders, like manufacturers offer retailers in other industries?

Robert Jones, a mortgage industry executive from Ft. Wayne, Ind.-based Waterfield Mortgage, reflects on why this may have an impact on the industry from a wholesale perspective. “I think there are several issues to consider. The first point to ponder is, is a service professional getting preferential treatment, or something of value, based on volume? The Real Estate Settlement and Procedures Act (RESPA) prohibits anything of value being provided without being disclosed to borrowers,” said Jones. “This is an important issue that some lenders have walked up to and said, ‘No.’” The point is, that just the perception of a disclosure issue, might scare some lenders away from co-op marketing.

A former wholesale executive for a large California lender, Jones added, “I believe the other pertinent issue lenders fear, is that they will drive business to a broker who won’t serve their needs properly. Most importantly, some lenders are afraid that they will spend money and time on co-op programs with brokers, and wind up with only a small portion of the total loans the broker will ultimately generate. Lenders typically contemplate what they are going to get from the dollars spent, not the goodwill they will receive from the broker. Of the amount of business that comes in wholesale volume, lenders want to ultimately get their share (or more) of the business generated.”

Furthermore, many large lenders, that are very sensitive to compliance issues, prefer to remain stagnant, rather than take a risk and try something new. On the other hand, a great many other mortgage wholesalers might take a look at a co-op marketing opportunities and say, “Yes, this is possible and we can do this,” Jones said.

Approaching Potential Partners
There are many different co-op approaches. For example, an Illinois company found a way to provide specialized materials to banks using a cooperative method. This innovative mortgage firm has aggressively solicited business from banks of $350 million or less, especially those of $100 million and less. Their co-op advertising program evolved out of earlier efforts to give marketing support to, and empower these bankers. The mortgage company developed and copyrighted a 36-page, user-friendly loan instruction and application packet organized around the Form 1003, which made it extremely easy to use. Experience proved that for every three documents distributed to real estate agents, attorneys and others, one loan application resulted.

The only catch was, the booklets were costly and the bankers were often unwilling to invest the necessary funds to purchase them. The mortgage company could not afford to give them away and have them stay in bankers’ desks either. Thus, the firm developed the idea of giving participating lenders credit for three free publication packets for each application they received from them.

The program was so successful that a subsequent special home equity lending program was introduced, which provided applications, bank-personalized, four-color statement stuffers, and other support materials. Banks were able to purchase these materials at moderate prices. They could keep the home equity loan on their books or sell it to the mortgage company, which would cover all processing expenses (approximately $1,200). Marketing materials were furnished free for the first 90 days, and thereafter were available on a co-op basis from the proceeds of the home equity loans sold to the firm.

As you consider co-op possibilities, remember that what may be a huge advertising expense for a mortgage broker, is often very small change to a large mortgage wholesaler. You may find local lenders more receptive to the co-op idea, as they will have fewer originators approaching them with similar marketing requests. Regardless of the lender(s) targeted, it’s up to the originator to “pitch” the marketing programs to them, and a well-designed plan is essential to gaining their support. First, a co-op marketing program must identify goals, budgets and a timeline for success. Say you want to do a seminar for first-time homeowners, and you know your best wholesaler has a mortgage product that’s perfect for many of your prospective customers. In addition to the cost of the seminar location, you will need funds for advertising in the real estate section of your local newspaper, as well as collateral or hand out materials.

If you have a good rapport with one of your best wholesalers, talk to your representative and ask him or her if their company would be open to the idea. Second, put the concept in writing and present it in person, if possible. Third, follow up with a phone call and listen carefully to any objections. If there are RESPA concerns, point out the fact that they are welcome to use your idea with other brokers if it works well with your firm. If cost is a point of objection, ask your representative how they do budgets and if he or she can think of other areas where your program could be funded. Besides an advertising budget, large wholesalers often have hundreds of thousands of dollars allocated for correspondent relations.

With the mortgage refinance business slowed to a crawl and the economy slowing, there’s no time like the present to get started on a new approach to marketing in the mortgage industry. Co-op agreements might just be the catalyst to propel your business forward.

by William Mills III

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