The Economics of a Private Lending Correspondent Program

Learn about the economics of RCN Capital’s private lending correspondent program – points, fees, yield spread and more. Private Lender Link’s CEO, Rocky Butani visited RCN’s office in Connecticut in January 2023 to interview the company’s CEO, Jeffrey Tesch. Watch the video or read the transcript below.

ROCKY BUTANI:
Tell me about the economics of this whole correspondent program. If I’m a broker, what are the points and how much am I making?

JEFF TESCH:
When you enter the correspondent, we’ll call it division of the relationship with RCN Capital, all of those three tiers are priced into a matrix that you’re going to sell off of. Basically, we’re going to give you the ability to mark up rate, we’re going to give you the ability to mark up points, we’re going to give you the ability to mark up fees. All this will be disclosed on the HUD, but what we do is give you the base – this is what we need to close the loan. Then after that, you as the correspondent are empowered to raise that fee and set the pricing that you believe the customer can handle. That’s key, especially when it comes to the various fees. Some lenders like to be able to add on some sort of an application fee and all the work that goes into it, other lenders don’t. The key here is we give the correspondent lender complete control. Once we set our base pricing, the CL (correspondent lender) can do whatever they need to do to be able to build out a profitable loan.

ROCKY BUTANI:
You said, “fees versus points.” Are those different?

JEFF TESCH:
Absolutely. Some lenders will charge an application fee, some lenders will charge a document collection fee, and most of these fees do add up. And there can be customer resistance with them, but every correspondent lender knows their customer and where the threshold is. At the end of the day, they might be able to charge a processing fee that is more palatable than a points fee or a higher rate fee. It’s really a bucket and at the end of the day, they’ll know where the customer threshold is.

ROCKY BUTANI:
In terms of fees, are these on top of whatever RCN is charging?

JEFF TESCH:
That’s correct. At the end of the day, there’s only one way RCN makes fees and it’s inside that pricing engine. We earn on whatever the origination fee is and that can go from zero up until 4 or the rate and that can go from whatever the baseline is at that time up until X. Now, obviously if RCN’s getting no points, the rate’s going to be a little higher. If we’re getting high points, the rate will be lower. But after that, it’s up to the correspondent to decide all the fees. We’re not adding on additional fees outside of the standard closing fees that everybody has to charge as a lender.

ROCKY BUTANI:
So I can look at your pricing matrix and figure out exactly what the points might be on this particular deal, depending on a number of different factors, right? I don’t have to reach out to RCN and say, “Hey, can you give me a quote for this deal?”

JEFF TESCH:
All of our correspondent lenders have access through our proprietary software to this pricing engine and they control it from there. They know what RCN needs and then they just mark it up from there.

ROCKY BUTANI:
What about the rate? You said that I can mark up the rate?

JEFF TESCH:
That’s correct. When it comes to earning fee, the fees are really ancillary. Where the correspondent lender makes their money is on points and rate. That’s always a tough balance. Some customers are very rate sensitive, others are very point sensitive, and once again, it’s up to the CL (correspondent lender) to know what their tolerance is with their customer. But at the end of the day, as that rate goes up, typically the points go down, and as that rate goes down, typically the points go up. On the point side, it can be anywhere from zero to four on either side, whether it be bridge or DSCR. That’s how it works. What we love the most is the correspondent partner has control, they control the process and we give them the tools to do that.

ROCKY BUTANI:
In terms of points, are there limits on what I can charge compared to what RCN has to charge on a particular deal?

JEFF TESCH:
Yeah. At the end of the day, we don’t like to see points above four on any loan.

ROCKY BUTANI:
You mentioned the possibility of zero points. Could that be on every deal or does that vary based on the type of loan?

JEFF TESCH:
Mostly you only see zero points on long-term rental loans. That’s where you really see it the most. On bridge lending, you almost always see points.

ROCKY BUTANI:
Could you give us an idea of what the typical points are? Is it RCN charging 1 point and then I could charge on top of that?

JEFF TESCH:
That’s correct. On the DSCR, it really involves the rate a great deal, but on the bridge side, typically RCN’s getting 1 point. Although if the rate goes up, we could go below that, but most of the time it’s one and then the broker will add on 1, 2, or 3, whatever they like.