In the past few years, National Bank of Canada (NBC) has nurtured its broker business from 2.7% market share in Q4 2010 to just over 5% today.

A portion of that growth is thanks to FirstLine and ING exiting the channel. But the real success drivers have been NBC’s niche products and industry-leading status program.

Last week, however, NBC announced changes to that program, and there will be winners and losers. Here’s a breakdown of what’s new and what it means to brokers.

The good news for brokers

• Effective November 1, highly efficient brokers will be able to earn up to one-half point of combined volume bonus (VB) and efficiency bonus (and over 50% more total comp on a 5-year fixed than most lenders offer)
• Top-status brokers can also earn from $5,000 to $30,000 in travel vouchers. (National says it expects to “see an increase in the number of brokers receiving travel vouchers” as a result of lower qualification thresholds.)
• NBC continues to offer the best readvanceable mortgage in the business in the All-in-One, and it still pays well on the approved limit.

The bad news for brokers

• National Bank is cutting its VB again, this time down to 10 bps—now near the lowest in the industry among lenders that pay VB. (This point is mainly relevant to low volume brokers with below-average funding ratios. They’ll take a pay cut versus the current program.)
• “Quick close” pricing is being eliminated and replaced with occasional promotional pricing (at times when NBC wants to drive volume)
• 1-year and 10-year comp drops 10 bps
• National’s 15 bps rate discount (option #3) is gone
• Cashback is being reduced (under “option #1”) for top-tier brokers
• Appraisal rebates are being eliminated
• Marketing dollars are being eliminated

In sum, NBC has taken a generous status program and turned it into a more balanced one (for the bank). From what we gather, these changes are intended to:

• “Ensure sustained profitability of the broker channel” (A quote from NBC’s broker notification.)
• Create a flatter, simpler program (NBC wants to incent volume from smaller producers who are more profitable, per deal, for the bank.)
• Improve broker efficiency and operational efficiencies
• Even out the pricing differences between NBC’s broker and retail channel
• Reduce the number of rush deals (common with 30-day rate holds)

The potential outcome

Three considerations come to mind:

1. Only a small minority of brokers can hit the approval ratios, approved-to-fund ratios and volume numbers required for top-tier compensation.
2. Reducing VB may be a disincentive for new brokers to send business to the bank.
3. Some firms do not pass on efficiency rewards to their agents, which will partially nullify the incentive of higher efficiency bonuses.

All told, our guess is that NBC’s volume drops unless its rates are meaningfully more competitive than its peers.

On that note, NBC is sending a message on rates by eliminating quick closes, reducing the relative discounts on 1-4 year terms, and cutting its 15 basis point discount option altogether. NBC says its current rates are “in-line” with its peers, but “in-line” rates are not good enough for most of NBC’s top-status brokers.

In the end, ultra-efficient high-volume brokers may do well under this program. Smaller and/or less efficient brokers, not so much. They are the casualties here. But such is the price (apparently) for keeping a major bank committed to our channel. We just hope NBC deems this enough “change” for a few years.

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A quick chat with Mark Squire, director of Mortgage Broker Services at National Bank:

CMT: What are brokers doing that is so costly to NBC that it had to make these changes?

Mark Squire: It’s not that brokers are doing anything to make it costly for National Bank. As we all know, the mortgage industry is a low-margin business, and yet a very competitive one as mortgages have become very much of a commodity over the last several years.  Any financially healthy business will re-evaluate and make adjustments to his or her business.

CMT: Why is National Bank so focused on number of deals whereas other lenders allow brokers to qualify on volume?

Mark Squire: For National Bank, the broker channel is a client acquisition strategy. Whether the mortgage is $50K or $300K, each represents a new client opportunity for the bank.

CMT: If virtually everyone is going to have the same volume bonus, why have a volume bonus at all? Why not just bake it into the finder’s fee?

Mark Squire: The industry is definitely changing with increased focus on efficiency and less on pure volume. National Bank introduced an efficiency bonus program in 2012 and since that time we have experienced improved ratios from many of our brokers. In this coming year we continue to place additional focus on efficiency, and reward our efficient brokers. The 10 bps volume bonus that we will be paying in 2014 – do I see that changing in coming years? The simple answer is yes. Whether it gets “baked into the finder’s fee” or gets attached to the efficiency program, we will need to wait and see. I believe we are going to see more lenders move away from volume bonus in favour of efficiency bonus.

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Sidebar: National Bank deserves some credit for going out of its way to explain to brokers, brokerage-heads and industry writers why it’s making these changes. We’ve seen that courtesy from a few other lenders as well (e.g., First National). Certain other lenders put adverse policy changes in take-it-or-leave-it style emails, which is not so endearing.

Full disclosure:  The author’s brokerage firm is a status broker with NBC.

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Rob McLister, CMT