Yield Spread Premiums (YSPs)

"Yield-spread premiums" is what lenders call them. Consumer groups call them legal kickbacks. YSPs are the cash that mortgage brokers or lenders get for steering a borrower into a home loan with a higher interest rate.

Good news: New rules issued by the Federal Reserve Board mean that YSPs are no longer legal.  The Fed rules ban brokers and loan officers from receiving extra pay based on a loan’s interest rate or other loan terms. Also, brokers can no longer receive “split” compensation, when payment comes from both borrower and lender—brokers must be paid by one or the other. (Loan officers never could receive split compensation because they are always paid by the lender.)

In short, the new rules mean that mortgage brokers will have more incentive to shop for the best deal for their customers instead of the biggest payment from the lender.

And if you hear that the new rules will raise the cost of mortgages, don’t believe it.  With brokers’ incentives better aligned with their customers’ interests, and with greater transparency in mortgage transactions, we’ll never miss YSPs and consumers can get better deals.

New loan officer compensation rules take effect.
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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.