The loan origination business is a perfect example to demonstrate an application of standard variance  analysis in business management.  Variance Analysis is the tool used to measure the effects of  business decisions on the net revenues of a business.  Net effect means what components of my  business decisions had the greatest effect on my bottom line.  In other terms what is the effect of  placing minimum basis points on fees earned vs allowing for a range based upon originator discretion.

The variance analysis in loan origination starts with a standard plan for the company and then adapting  it for each persons individual current year plan. Plans can be standardized for New LO's, Experienced  LO's and Senior LO's.  The sum of the plans must equal the Company Plan.  This can be done by  using an excel spread sheet with each sheet totaled for the company.  

The components of a plan are for any month, quarter or year:

Volume:       Total dollar amount of loans to be funded

Units:      Total number of units closed

Fees:       Total dollar amount of origination fees earned

This usually will be your last years numbers.

From these numbers we calculate the following:

Standard Loan Size:        Average loan size

Standard basis points:     Average basis points earned per loan

Then we input the current periods actual numbers compared to the standard.

Combined with a little magic and some quick calculations we determine the following information:

Total Variance       Difference in the fees earned from the planned amount in dollars

Volume Variance   How much fees were added or subtracted because of the number of units  difference

Size Variance        How much fees were added or subtracted because of the loan size difference

Price Variance         How much fees were added or subtracted because of the average points earned  differed from the plan

The results are sometimes very revealing.  It helps guide originators and managers to focus on certain  areas of the their plans.  It helps originators focus on the business of loan origination, which by the  way is how we are paid to provide a valuable service to our clients.