Yield Spread Premiums (YSPs)
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"Yield-spread premiums" is what lenders call them. Consumer groups call them kickbacks.
They're the cash that mortgage brokers get for steering a borrower into a home loan with a higher interest rate.
They're everywhere - even though prominent academics, state attorneys general and even some lenders say that often they're an invitation to steal.
Kickbacks can cost homebuyers thousands of dollars extra on their mortgages. "Consumers," Iowa Attorney General Tom Miller said recently, "are paying more than the fair market price of their loan."
Yield Spread Premiums: Incentive for Equity Theft
Minimal Broker Licensing Standards Will Not Affect Abusive Lending Practices
FACTS ABOUT YIELD SPREAD PREMIUMS
Here are some facts everyone should know about yield spread premiums, or YSPs, as they're called.
These kickbacks hinder decades of progress in eliminating racial discrimination in home lending. The statistics the Home Mortgage Discrimination Act requires the federal government to collect from lenders every year shows African-Americans and Latinos get high interest rates far out of proportion to their share of the population. The industry's explanation -- that minorities have weaker credit on average and lenders need to charge higher interest to cover their risks -- doesn't hold up, research by the Center for Responsible Lending shows. We looked at 50,000 sub-prime mortgages recently and found that African-Americans and Latinos got higher interest rates even when their credit risks were identical to whites'. A big reason for the disparity is most likely kickbacks, say many experts.
Download the report, PDF
Many brokers say yield-spread premiums help homebuyers by letting them spread out the upfront costs of taking a loan by paying a higher interest rate. That is a myth. In fact, Harvard Law School Professor Howell E. Jackson found in a study, brokers rarely even offer this option - or inform borrowers they're being steered into a higher interest rate.
This is no small problem. The sub-prime mortgage market -- where people with blemished credit borrow, and where most predatory lending occurs -- is a half-trillion-dollar-a-year business. The sample of thousands of home loans Professor Jackson studied suggest as many as 90 percent of sub-prime loans involve kickbacks. Borrowers in his study paid an average $1,850, making these kickbacks by far the largest source of compensation for brokers. They cost borrowers $3 billion a year, we estimate.
Lenders who collude in the kickbacks then chain the borrowers to their loans by holding big penalties over their heads for paying off the loans early - charging people thousands of dollars to refinance their loans if and when they realize they've been gouged.
Right now, brokers are required to disclose the kickbacks on loan forms, but they do their best to minimize or disguise them, often disclosing them in footnotes or not clearly describing them.
WHAT'S THE SOLUTION?
* Make the lending industry count these kickbacks toward the legal threshold that determines whether a loan is classified "high-cost." The government puts additional protections on "high-cost" loans, which discourages lenders from piling on YSPs and other fees. The debate over predatory mortgage lending legislation is happening right now in Congress, and the mortgage brokers' squads of lobbyists insist the brokers be allowed to keep collecting these kickbacks.
* Require any federal legislation to ban brokers from gouging their customers -- a standard that, astonishingly, the federal government does not hold them to now.
* Require lenders in the sub-prime market to disclose how they set the rates on their loans. And make sure regulators have the resources and authority to fully enforce fair-lending laws.
