WLN Articles

Brokers and Third Party Originators: Lessons Learned for 2012 and Beyond

Stock broker, insurance broker, investment broker, mortgage broker or equipment lease broker –chances are only two out of five of those companies that existed in the early 2000s are still doing business today. This is according to a survey conducted by Access Mortgage Research and Consulting Inc. of Columbia, Maryland, which reported that the number of mortgage brokers in the United States peaked between 2002 and 2006 with over 50,000 brokers serving the mortgage sector. This number is now at a twenty-year low of less than 15,000 mortgage brokers. The fact remains– the number of brokers delivering services in the investment and finance sector has been decimated. Does this have any valid comparison to the broker and third party originator (TPO) in the commercial equipment finance sector?

As we begin the New Year there has been much discussion in the equipment finance sector about the continued viability of the broker and third party originator (TPO) model. So exactly what function do the broker and TPO provide?  Is there a role for the broker and TPO to help shape the future of economic growth? And if the answer is yes, what can a broker and TPO do to stay on track and gain an advantage?

The lease and finance broker equates to the sales engine that has long been a part of the financial products delivery system. The broker’s ability to maintain numerous funding partnerships and perhaps even volume discounts provides multiple funding options for both the manufacturer/vendor and equipment buyer. Successful TPOs are experts in these areas of relationship management and are often serving the same company with multiple acquisitions over the years as their mutual businesses grow. TPOs are skilled at developing local relationships and an in-depth understanding of their clients business, customer base and industry as well as then presenting the opportunities in comprehensive financial packages to their banks and funders.  And as their clients grow and become more financially secure they will of course insist on better terms and rates. Throughout this evolution the TPO has positioned themselves to respond to the changing needs by offering an independent risk based funding source during challenging times or during the inception of the business while offering terms and rates equitable to bank financing as the business becomes stronger and well established. If a banking institution denies a borrower they have no other alternative except to restart the process with another bank. A broker and TPO have a thorough understanding of the transaction and can pursue other options, which offer a wider variety of funding possibilities. The function of the broker and TPO and a sales channel has been of great service and value to both banks and independent funding sources.

While the number of bank losses has been decreasing, low interest rates and new regulatory requirements have resulted in fewer credit approvals and stagnant loan growth. Due in part to the Dodd Frank Act, banks are facing tighter regulation and many investment companies are staying away from bank affiliation to avoid tougher laws with the realization that being part of the bank system will require more stringent capital requirements and will not accommodate structures that are based on a risk pricing system.  Commenting on the recent sale of MetLife Bank’s depositor business to GE Capital Paul Menzel, CLP, President and CEO of Financial Pacific Leasing said, “Due to its structure and collateral, equipment leasing is not weighted 100% for capital adequacy purposes and therefore requires more capital to be held against those assets.  Bottom line, it will probably force ‘banks’ to be more conservative in their lending and pricing to meet capital requirements and ROE hurdle rates. This will create opportunity for the TPO market.”  Menzel added, “I think the slice of the ‘non-bank’ segment will continue to be significant enough to support a vibrant TPO industry.”

Emerging technology and tighter regulations may cause concern for some, however others see it as a sign that the broker model as a sales channel will continue to thrive. Gary Souverein, President and COO of Pawnee Leasing Corporation agrees, “…the future for the independent broker is bright. The truth is there has been a cleansing albeit painful, in our entire industry. This was needed following an overheated credit environment and we believe a healthier environment will emerge. While it will be a slow process, there will be new entrants on the funding side of the business as demand increases.”

Now is the time for a broker to solidify their share of the market and position themselves for eventual recovery.  Yes, eventually, it will happen. However there is little doubt recovery is going to be slow. First, go above and beyond on due diligence with research and credit development. Ensure accurate and thorough presentations including accompanying financial packages. Align the brokerage with a range of established funding sources and banks that demonstrate commitment to the value of the TPO channel.  Consult with local banks about offering prospect development for their commercial loan program.  Further, once the transaction is booked stay in touch with funders to ensure customers remit in a timely manner.  The TPO is value added and don’t hesitate to get involved even after the deal has booked. A well performing broker portfolio speaks volumes with banks and independents.  Trust, credibility and dedication count not only with your vendors, lessees and debtors but with your funders, too. Next, continually strive to learn more and network through the array of opportunities offered by industry associations like NEFA and NAELB. It is worth the time to research eligibility for the Best Practices Broker™ designation offered by NAELB and the Certified Leasing Professional accreditation offered by the CLP Foundation.

We can observe that the value added TPO will play a key role in shaping economic growth. Technology undeniably plays a key role in gaining an advantage, however, it will never replace visiting your customer’s office, shaking their hand and understanding how they operate in addition to their financial statements. We are all in business to make money but it is not the be-all and end-all of happiness as the deal is not over when the deal books. We are also in business to be successful and that means helping clients be successful time and time again. This recession has given us all plenty of time so sit back, evaluate and look at opening our creativity to uncover new ways to do business better. Now is the time to learn from what has happened in the past and to mold your business into what you really want it to be.