If you have purchased a home through a mortgage broker, you may have paid a yield spread premium (YSP) whether you realized it or not. Effectively, a YSP is a fee paid by lenders to mortgage brokers to sell a loan at a higher rate than the borrower qualifies for, in order to cover (and possibly increase) the broker’s commission. The difference in the charged rate and the market rate is the “spread” of the YSP.
From the perspective of a homebuyer, why would you accept this? Think of YSPs as a form of “reverse points” – instead of paying money upfront to lower your rate, you are raising your rate to cover closing costs, fees, or other upfront costs – including the broker’s commission.
A YSP can be known by other names such as a rate participation fee, par-plus pricing, or other sneaky synonyms. It can be difficult for homeowners to understand where the fees are going, and what a reasonable fee is.
The Center For Responsible Lending (CRL) calls YSPs a thinly veiled kickback to brokers, and charges they are often packaged with prepayment penalties that ensure the lender recoups their money through the higher rate charged to the borrower. CRL contends this is an incentive for brokers to act against the best interests of the borrower.
Lenders and brokers point out that YSPs allow greater flexibility in constructing loans by deferring upfront costs, and to ban them harms those who are struggling with home affordability the most – the very people the Consumer Finance Protection Bureau(CFPB) and the Dodd-Frank legislation were designed to help.
Who’s right? Both, it would seem. YSPs are like any other tool; they can do either good or harm depending on who is wielding them. All sides seem to agree they were abused in the subprime mortgage crisis. The question is: how to make them as transparent as possible and regulate them properly – or do we just eliminate them?
The Dodd-Frank legislation and actions from the CFPB and the Fed effectively outlawed YSPs … or did they? Not really.
Prior to these actions, the broker’s compensation could be split, paid partially by the lender and partially by the homeowner – making it even harder to identify bad deals. It is now an either-or situation. Brokers cannot collect both YSP and a loan origination fee from the lender. The loan origination fee that goes through the lender includes the broker’s fee, and may be higher than the amount you would pay through a YSP.
Why not go through a direct lender or bank and save the difference? Nice try, but in that case you run into a Service Release Premium (SRP). SRPs refer to the money that the direct lender receives when your loan is sold after closing. These do not have to be disclosed, as YSPs do for mortgage brokers – causing brokers to cry foul.
The main point to remember is that everybody involved in the mortgage process is making money – otherwise, why would they be in the process at all?
Lenders and brokers are making it difficult to compare the compensation of all involved; CFPB and regulators are attempting to make the process more transparent and remove predatory aspects of a potentially useful service.
Regardless of who is winning that struggle, your mission as a homebuyer is the same – understand all fees before you sign the closing documents. The Loan Estimate and Closing Disclosure form you receive before closing should have all the information you need to get you started.
Ask all the questions and demand all the definitions that you need to execute your mortgage with confidence. This allows you to negotiate the best terms for your needs, and to avoid being ensnared in a bad deal through lack of understanding. If you don’t, and end up overpaying, you’ll have no one to blame but yourself.