Yield Spread Premiums (YSP)
The yield spread premiums affect only those borrowers who choose to get a home loan through a mortgage broker, rather than directly from a lender. Brokers originate more than half of all residential loans, according to several estimates.
Although they sometimes loan money, most brokers serve as middlemen who handle certain underwriting tasks that a traditional loan officer would otherwise do. As a result, lenders offer brokers wholesale rates. A broker then takes those rates and adds a surcharge to cover the cost of underwriting, arriving at the interest rate charged to borrowers.
If you choose a high enough rate which carries a large enough rebated yield-spread premium, you may wipe out or offset all your other loan costs— you’ve heard of "no-cost loans?" That’s all a no-cost loan is…..a higher rate of interest loan, where the lender pays the other loan costs from your yield-spread premium!
How brokers are paid
Yield spread premiums become an issue when borrowers don't want to — or can't — pay the brokers' fees upfront. In those cases, brokers can collect payment from lenders. The lender then rolls the additional cost into the interest rate of the loan.
The broker's fee is based on the amount of income the loan will "yield" to the lender, experts say. The higher the rate on the loan, the more money the lender makes from interest, and the more money the broker earns as his "premium" upfront. Critics maintain that this gives brokers an incentive to hike rates
The yield spread premium allows (brokers) to offer clients a no-point loan by allowing us to earn a fee from our (lender) rather than the borrower at closing.
"The trade-off that a borrower has to evaluate is, 'Is it worth it to pay a higher interest rate?' because the yield spread premium is determined by increasing the interest rate."
Borrowers Need to Decide
While some argue that the premiums are always out of line, consumer advocates warn that borrowers need to be aware of the fees and make informed decisions about what they're willing to pay when obtaining a mortgage.
"There are three ways to cover the cost of a loan. One, you pay cash out of your pocket; two, you can borrow more; or three, you can have the loan rate be higher, and then, if you make the loan rate be higher, you're going to be paying it back over time," says Margot Saunders, a managing attorney with the National Consumer Law Center in Washington. "If you choose to do it that way, obviously there's nothing wrong with that. Our main goal is to stop the abuse."
Where the Abuse Lies
Reports of unscrupulous double-dipping, where a broker collects a fee from the borrower and also inflates the rate to get more money from the lender, have drawn the attention of both the judicial and legislative system. Some brokers have been accused of steering business to specific lenders just to get increased fee income.
Until Congress and the courts figure out how to deal with the premiums, experts advise mortgage hunters to vote with their dollars.
"There's nothing to prevent consumers from asserting that, in order for me to do business with you, I have to understand X, Y and Z," says Saunders. People can say "you have to tell me what the rate is, ... what the cost of the loan is to you, and how much you're going to make from both me and the lender."
Borrowers should strive to get the information as soon as possible, preferably in writing, she adds. They also should obtain estimates from more than one broker and check the settlement statement that comes around closing time to see if a fee is included. If so, make sure it's a reasonable one — somewhere between three-quarters of a point and two points.
HUD Statement of Policy on Yield Spread Premiums
According to HUD, yield spread premiums help potential homebuyers become homeowners by letting them pay less at the time of settlement and pay a higher interest rate and monthly payment over the life of the mortgage.
Many potential home buyers do not have the cash to pay the upfront costs of buying a home, including the settlement costs such as appraisal fees, title insurance, the fee charged by a mortgage broker for doing the paperwork and similar costs.
The mortgage broker pays the upfront costs instead and then recoups these costs by selling the mortgage to an investor at a higher price, reflecting the higher interest.
HUD says its chief concern is that yield spread premiums can also be abused. The department contend a broker can persuade the home buyer to accept a higher interest rate without enjoying lower upfront costs. The lender or broker pockets the yield spread premium and the home buyer pays a severe price.
HUD believes its statement of policy, issued on March 1, 1999, says that yield spread premiums are legal if the broker actually performs services for the home buyer and if the total compensation the broker receives is reasonably related to the total value of the services the broker performs.
Pursuant to the HUD Policy Statement:
- Lender payments to brokers, i.e. yield spread premiums, are not per se illegal, but they must be analyzed on a case by case basis.
- A two-part test is necessary to determine if lender-paid broker compensation is permissible. This test examines: (1) whether the broker provided compensationable goods, facilities, or services; and (2) if the broker’s total compensation is reasonably related to the value of goods, facilities, or services it provided. Total compensation includes direct origination and other fees paid by the borrower, indirect fees, derived from the interest rate paid by the borrower, or a combination of some or all. HUD considers that higher interest rates alone cannot justify higher total fees to mortgage brokers.
- Lender-paid broker fees should be disclosed on the Good Faith Estimate and HUD 1 Settlement Statement. It also urges voluntary disclosure of broker’s compensation prior to loan application.
The Policy Statement does not mandate any other additional disclosures to the borrower by the lender or mortgage broker. However, it does suggest that disclosure may be necessary where indirect fees (yield spread premium payments) will be paid.
Consumer Advocates: Yield spread premiums cost mortgage borrowers millions each year
Take your pick: Yield spread premiums either cost homeowners millions in extra interest payments or guarantee them more choices when it comes to getting a mortgage. It just depends on who's talking.
Brokers have been collecting the backdoor payments from lenders for many years, and borrowers have largely remained in the dark about the deals. But that may be changing, as courtrooms around the country and officials in the halls of Congress increase their focus on the issue. New legislation regulating the premiums is expected next year.
"This is an exceedingly widespread practice in the industry and there's no doubt this occurs across the country every day," says Edward O'Brien, a Nashua, N.H., attorney who represents a couple allegedly victimized by the practice of paying yield spread premiums. "The only mystery out there is how this has gone on for so many years."
Behind the scenes
There are plenty of legitimate behind-the-scenes steps involved in the lending process, from record searches designed to find out if homeowners have flood insurance to credit and income checks designed to ensure a loan will be paid. Yield spread premiums, however, may or may not be legitimate and borrowers are given little information to help them assess the charges.
If You Have Been Overcharged
If you are worried that you may have been overcharged by your mortgage broker or lender, please contact an attorney. One indication that you may be a victim would be listed on your HUD-1 or "Settlement Statement" form. This form was provided by the escrow company. If you have misplaced your original, the escrow company can provide you with a new copy. The form is several pages describing payments made into and out of the escrow account.
If you find any of the following reference descriptions used by the mortgage brokers and lenders to describe the referral fees, you may be a victim and should contact an attorney:
"yield spread premiums,"
"service release premiums,"
"rate participation fees,"
"service release fees" or
For more information
Understanding RESPA: HUD’s Recent Statement on Yield Spread Premiums at http://www.franzen-salzano.com/publications/RESPA-Equity.doc.