By Mike Sweigart

Lately, many advertisements and articles have been plugging net branches or some variation of a franchise as the "future of mortgage lending."  However, other publications claim that such arrangements are illegal. How do you know what to believe? Is it wise to gamble your future on an arrangement that might be prohibited six months from now? Is this a vision of the future, or merely a smoke-and-mirror illusion. What is the future of such arrangements?

While we all agree that the concept itself is intriguing, it is clear that net branching cannot remain as lax and uncontrolled as it has been in the past. Yet, this control must come from the companies themselves, rather than from regulators. Many companies have succumbed to the greed factor and allowed unqualified individuals to broker loans in their names under the guise of a "net branch." While they were making a quick buck, they also managed to rile regulators into an unnecessary uproar.

The basic premise that has led to the proliferation of this branch system is, in the cry, a good one. It allows a mortgage company to expand its presence while limiting its initial cash outlay and the negative impact on the balance sheet. The branch owner on the other hand, is able to earn more than a company-owned store manager for his or her investment and willingness to sign the lease and buy the equipment. It also gives branch owners a head start and a support system, as opposed to them being totally on their own as brokers. It is a great cooperative relationship. As in any industry, a cooperative arrangement that brings people and products together with individuals willing to do the a good thing.

This would be a win-win situation if it weren't for the fact that, for the most part, nobody takes the responsibility of overseeing the branch's activities. Some companies figure that, if they earn their percentage of the fees and have no cost in managing or monitoring the branch, they come out ahead that is, as long as the complaints and suits don't come in too quickly.

As I researched and observed what was going on in the industry with regard to the few net branch companies that had been successful, I saw that, on the other side of the coin, the majority of companies were not truly taking care of the branches. They failed to provide ongoing training and, other than a few days of orientation, the employees were on their own. They also fell short with support and upper management. I guess they figured that 1 loan per month from 50 branches amounts to 50 loans and, if they had no expense from the deals, then the numbers worked - even if the branch owners were starving.

This lack of training, oversight, and accountability seems to have created the opinion among regulators that net branching is a bad program and should not be allowed to continue. I have had more than one regulator tell me that when they contact the parent company of a net branch with a consumer complaint, the common attitude and response is, "Well, that is just a net branch, so we don't have any control or responsibility over what it does."

Even large lenders are becoming cautious when they see deals being brokered to them from net branches. It seems to me that the problem stems from the fact that branches typically use the parent company's lender's license, but actually act as brokers. By design, they are usually exempt from state mortgage brokering laws and oversight. With no support or training from their parent companies, they are often in over their heads.

When I initially developed the model for a branch network and presented it to some other company owners to obtain feedback, the first questions posed were, "How are you going to make sure that the wrong branch manager won't do something to get your license revoked?," or, "How can you trust someone in a different city whom you hardly know to protect your interests?" Those types of valid concerns led me back to the drawing board refine my bright idea.

When Midwest National Mortgage Banc President Randy Carson and I began perfecting what we both saw as an excellent opportunity, we agreed to make sure that safeguards were put into place. We knew that we did not want branch owners who could not get a license. We didn't want people who desired total responsibility for running a company, but rather, those who had the mindset and ability to create success. Midwest was already doing wholesale business, so it had the safeguards in place to detect and prevent fraud.

We decided that we wanted "partnership" branches; we want the branches to be one of us. We require that all branch employees are Midwest employees, and they do not broker loans. We do not allow them to carry a broker's license, and we require that all employees attend training seminars that we sponsor at least four times per year. Midwest even offers cooperative advertising and lead generation. Our company policies are for everyone, regardless of whether they are corporate-owned or partnership branches.

In addition, Midwest retains the right to fire branch employees or managers as necessary to protect the company, and we made sure that we had regional managers in place to supervise corporate-owned and/or partnership branches. They address compliance issues as well as provide sales and operation training and support. Because of our control and structure, our partnership program has never been turned down by a state in which we have attempted to become licensed - even the states that that do not permit net branches.

As an answer to my questions posed in the first paragraph, I do believe that, if done correctly, the net branch system is a very good program. It can provide the branch owner with an opportunity to remain an entrepreneur with the back room support and resources of a large company. For the parent company, it can provide a vehicle for growth and expansion. And, of course, the consumer will benefit, since increasing and creating higher quality competition will presumably drive prices down.

I am confident that these programs will survive. The net branch concept is still in its infancy and we will see an evolution or even a metamorphosis while the industry tries to determine what will work. We can expect to see this phenomenon grow as it becomes perfected. I expect that the number of companies offering net branch opportunities will decrease, as the companies merely seeking a "quick buck" will move on to something else. The ones who have a definite commitment to long-term success will make it work, and work well.

Mike Sweigart is Vice President and Partnership Branch Development Director of Midwest National Mortgage Banc, Inc. He may be reached by phone at (877) 256-2643 or by pager at (614) 640-7823.