Yield Spread Premium - Banks Versus Mortgage Brokers and YSP

Banks Versus Mortgage Brokers and YSP

Lenders that fund loans and then sell them after closing do not need to disclose the amount of the yield spread premium they make. This is a HUD rule (RESPA 1974). On the other hand, brokers are forced to disclose the amount of yield spread they get from the bank. HUD's stated rationale 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.

The Federal Reserve Bank has proposed significant changes to the Home Ownerships and Equity Protection Act (HOEPA) and Regulation Z, regarding yield spread premium disclosure, on December 12, 2007. The related part of the proposal will require a mortgage brokerage to negotiate a dollar-specific fee, in writing, for their services or waive the right to receive yield spread premium from a lender. This will allow a consumer to "shop" mortgage brokers on "price" and specifically guarantee that compensation harvesting is eliminated by mortgage brokers.

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. On the other hand, consumers are never made aware of the amount of profit that large institutional lenders generate when they in turn sell servicing rights to another lender. Further, many mortgage brokers argue that the use of the term "par rate" in describing YSP is misleading; if a true "par rate" is provided to the customer, the only way for a mortgage broker to earn compensation would then be to charge additional origination and/or discount points to the consumer, whereas the institutional lenders commonly set their zero-point loans at a significantly higher rate than undisclosed "par rates" of the secondary market.

Many brokers maintain that the best way to serve the interest of the consumer is with fair, full, and uniform disclosure of loan amount, interest rate, and settlement costs. Toward that end, they argue that the single best way to compare different rates and fees is through examination of the Good Faith Estimate and Truth-In-Lending Disclosure, and further, through comparison of the Annual Percentage Rate that is disclosed in the Truth-In-Lending. YSP has no impact on APR; the variables impacting APR include loan amount, rate and fees. Therefore, with respect to obtaining the most cost-effective financing in both the short and long term, APR is the best index available to the consumer.

Another competitive disadvantage, seen from the point of view of mortgage brokers competing with institutional lenders, is that brokers, unlike institutional lenders, have to disclose that they earn YSP on the Good Faith Estimate. There are two separate Good Faith Estimates, one for the broker, one for the institutional lender. The difference is one section that exists only on the Good Faith Estimate used by the mortgage broker. It states:

"Compensation To Broker, Not Paid Out Of Loan Proceeds"

The exact disclosure requirements vary between states. In some states brokers must disclose a range, typically 0%-2% of the loan amount, but not the exact amount. Some states simply require that a warning is appended. Some states require the broker to disclose an estimated dollar amount, such as $2,500.

As of October 2007, Florida requires that the maximum compensation a broker might make on a loan be disclosed as a dollar amount (not a range). Furthermore, once the loan is rate locked and the amount of compensation is known, this amount must be re-disclosed to the borrower within 3 days of knowing the exact amount. The disclosure must be earlier than 3 days prior to closing. "Florida Statute 494.0038". http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=Ch0494/Sec0038.HTM. Retrieved 2007-11-02.

Institutional lenders are exempt from this requirement.