Yield spread premium
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Yield Spread Premium, or YSP, is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale Par rate that the borrower qualifies for.
For example, If a mortgage broker offers a borrower a loan of $100,000 at an interest rate of 6.25%, and the Par rate is 6%, the broker may earn a Yield Spread Premium (YSP) equal to 1.0% of the loan amount. This $1,000.00 fee is paid by the lender directly to the broker as a "rebate." The mortgage broker earns "one point" directly from the lender "POC" (Paid outside Closing). Although the borrower is not charged the fee directly, the borrower does pay the fee indirectly by accepting a higher interest rate in exchange for lower fees.
In the U.S., mortgage brokers are required to disclose YSP as a fee "POC" (Paid Outside Closing) on page 2 of the HUD1 Settlement statement, inside the margin, away from the column marked "Paid from Borrower's funds at Settlement"
Banks versus Mortgage Brokers and YSP
Institutional lenders are not required to disclose YSP. Their reason is that Institutional lenders sell their loans in a true "Secondary Market Transaction" sometime after the loan is closed. This means that the loan is sold at a later time and their true "Yield Spread" or additional revenue is not yet known. Although the exact amount they earn may not be known, the fact is that they are earning revenue that they do not have to disclose to the borrower.
This difference gives institutional lenders an unfair advantage over a mortgage broker because when a borrower closes a loan with a mortgage broker, the borrower is fully aware of the revenue that the broker business earns on their loan.
Another disadvantage is that a mortgage broker, unlike an institutional lender, also has to disclose that he earns YSP on the Good Faith Estimate. There are two separate Good Faith Estimates, one for the broker, one for the institutional lender. The only difference is ONE SECTION, only on the Good Faith Estimate used by the mortgage broker. It states:
"COMPENSATION TO BROKER, Not Paid Out Of Loan Proceeds"
The broker must disclose a range, typically 0%-4% of the loan amount. Institutional lenders are exempt from this requirement.
\"Giveaway to Big Business?\"
Sometime on or around 2002, The Secretary of HUD, now Senator Mel Martinez, R-Florida, tried and failed to pass sweeping RESPA (Real Estate Settlement Procedures Act) reform legislation that would have further put mortgage brokers at a disadvantage by requiring mortgage brokers to credit borrowers the amount of yield spread premium that they earned, and then charge the borrowers a fee to recover the yield spread premium. Lenders would have still been exempt from that requirement.
For example, If a borrower went to his regular bank or to a large lender, they may receive a quote from them of 6.25%, Zero Points. The lender presumably would earn approximately one point when they sold the loan at some later date.
If a mortgage broker offerred the borrower the same rate, 6.25%, the borrower would receive the one point YSP as a "Lender Credit to Borrower" Then, in order to earn the same fee as the institutional lender does above, the mortgage broker would have to charge the borrower a 1% "mortgage broker fee"
So, the mortgage broker deal would be 6.25%, 1 Pt. Fee and the institutional lender would be at 6.25%, zero points.
HUD proposed broker compensation disclosures as part of its July 2002 RESPA reform proposal (HUD 2002a, 49134). Mortgage brokers would be required to disclose, in the Good Faith Estimate (GFE) provided to borrowers, any compensation received from the lender in connection with the origination of the loan. A major part of the '''compensation is any Yield spread premium (YSP) paid by the lender for a loan originated at an above-par interest rate'''. The YSP reflects the additional value to the lender of a loan originated at the higher interest rate. The proposed disclosure was motivated by a concern that brokers were placing borrowers in above par loans without their knowledge, and keeping the YSPs rather than passing them through to consumers in the form of reduced settlement costs. Direct lenders would not be required to make the same disclosure, even though they may be charging the same interest rate and settlement costs and earning the same compensation as a broker.
The compensation disclosures had a significant adverse impact on the respondents perception of loan costs and on respondents’ choice of loans. The disclosures caused a significant proportion of respondents to choose more expensive loans by mistake and caused a substantial bias against broker loans even when the broker loans cost the same or less than direct lender loans.
'''The findings of this study indicate that broker compensation disclosures are likely to harm rather than help consumers and competition in the mortgage market.''' --The disclosures are likely to lead a significant proportion of borrowers to choose more expensive loans by mistake. --The disclosures are likely to cause a substantial bias against broker loans that may reduce competition and increase the cost of all mortgages. --All three versions of the compensation disclosure tested in the study resulted in significant consumer confusion about loan costs and a substantial bias against broker loans. This included versions that moved the disclosure to a second page of the cost information.1
1 Federal Trade Commission
Bureau of Economics Staff Report
James M. Lacko
Janis K. Pappalardo
February 2004 '''
No Closing Cost Loans Explained
YSP can also be used by a mortgage broker to offer "No Closing Cost" loans. For example, if a borrower takes a $800,000 loan and the total closing costs amount to $5,000, the broker could increase the interest rate that pays the broker a YSP of say 1% and the broker could then credit the borrower $5,000 of the $8000 made in YSP towards his closing costs. The broker would still earn $3,000 broker fee - all paid by the YSP.
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