Yield Spread Premium - "Giveaway To Big Business?"

"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 additional compensation when they sold the loan at some later date. For the sake of this example, we'll call it 1%.

If a mortgage broker offered 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 paid by borrower to broker, plus 1 points paid by lender to borrower, whereas the institutional lender could offer the equivalent at 6.25%, zero points. It is likely that borrowers would prefer the simpler deal from the lender, even though they would pay the same number of points (zero), and get the same interest rate. These concerns are corroborated by an FTC study, which found customers more likely to take a more expensive non-broker product under this disclosure method.

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.