What is a Yield Spread Premium (YSP) and What Does It Mean for You?
The yield spread premium (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. A par rate is the lowest interest rate a borrower qualifies for with a given lender. Obviously, most borrowers would rather take out a loan at the lowest possible interest rate. If the broker can convince the borrower to take out a loan at a higher rate, then the broker is compensated for doing so by the lender in a rebate or kickback.
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 YSP equal to 1.0% of the loan amount. This $1,000 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."
YSPs as a financial instrument are not controversial. What is controversial is how they are applied, and how and when brokers and lenders have to disclose their existence and their amount to the borrower.
Under California law, a mortgage broker owes the borrower a fiduciary duty. A fiduciary duty requires the broker to act in the best interest of the client. It is hard to see how a broker can honor this fiduciary duty and at the same time, talk the client into taking out a loan at an unnecessarily higher rate of interest.
If you have questions about YSPs or other loans issues, please feel free to give us a call at 1-800-306-6010 or contact us online.
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 YSP equal to 1.0% of the loan amount. This $1,000 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."
YSPs as a financial instrument are not controversial. What is controversial is how they are applied, and how and when brokers and lenders have to disclose their existence and their amount to the borrower.
Under California law, a mortgage broker owes the borrower a fiduciary duty. A fiduciary duty requires the broker to act in the best interest of the client. It is hard to see how a broker can honor this fiduciary duty and at the same time, talk the client into taking out a loan at an unnecessarily higher rate of interest.
If you have questions about YSPs or other loans issues, please feel free to give us a call at 1-800-306-6010 or contact us online.
