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Yield
Spread Premiums - The YSP
The U.S. Department of Housing and Urban
Development (HUD) issued revisions to RESPA that became
effective as of January 1, 2010. The RESPA revision is very
complicated and controversial. It is believed that it will
be revised again before it becomes final. Among the various
issues affected within the revision is the issue of YSPs.
The YSP is the amount of money rebated
by a lender to a mortgage broker for brokering a loan to
that lender at an interest rate above the Par Rate. The
Par Rate is the interest rate being offered by a lender
that has zero YSP.
Mortgage brokers are required to disclose
the payment of YSP on your Good Faith Estimate (GFE), but
there is still a debate as to whether Banks and other direct
lenders should have to disclose YSP. The HUD-1 is also required
to display payment of the YSP. Under the new RESPA amendment,
YSPs are to be disclosed as a credit to the borrower's origination
costs on the GFE and are no longer presumed to be paid to
the broker.
I am working to update this page with
more timely information regarding YSP, but since the whole
matter is still unsettled I feel this article by Broderick
Perkins remains relevant as a general explanation. For information
on the New HUD-1 form
please visit my section, The HUD-1
Form
Was Your
Yield Spread Premium Disclosed?
Even if mortgage brokers yield to pressure to make clear and
timely disclosures of controversial yield spread premiums
(YSPs), consumers will still have to contend with a substantial
segment of the mortgage industry that doesn't have to disclose
YSPs.
YSPs are points paid by lenders to brokers for loans carrying
interest rates above a par rate -- a rate at zero points.
(Points are expressed as a percent of the loan. Each point
is typically one percent of the loan amount -- one point for
a $100,000 loan is $1,000.). Conversely, on rates below the
par rate, lenders charge the points to the borrower.
As an example of how YSPs work, let's say the price quote
from the lender to the broker was 7 percent with no points.
The broker offered the same loan to the borrower at 7 percent
and 1.5 points, with the 1.5 points as the broker's markup.
By the time the loan is locked, however, market rates drop
and the lender is now offering a YSP of 1 point for the 7
percent loan. The broker pockets the difference as income.
The borrower may not discover the difference until closing,
when it must be disclosed.
When borrowing from financial entities that fund their own
loans, many consumers still won't know, on the average, they
are paying $1,850 per loan to cover the cost of YSPs, according
to an academic study of YSPs conducted by an expert witness
in a YSP-related civil suit.
"Lender payments to mortgage brokers where mortgage brokers
initially fund the loan and then sell the loan after settlement
are outside the coverage of this statement as exempt from
RESPA (The 1974 Real Estate Settlement Procedures Act ) under
the secondary market exception," according to the U.S. Department
of Housing and Urban Development's recent proclamation "RESPA
Statement of Policy 2001-1: Clarification of Statement of
Policy 1999-1 Regarding Lender Payments to Mortgage Brokers
and Guidance Concerning Unearned Fees Under Section 8( b)".
HUD's statement was the opening salvo last year that began
the new war against RESPA violators. RESPA, with HUD as its
enforcer, is a federal consumer protection statute that regulates
mortgage related fees and disclosures. Brokers largely have
been the target of HUD's recent enforcement activities because
they originate 70 percent of all mortgages and have been the
target of approximately 150 YSP-related civil suits.
"The law says if you are a broker you must disclose yield
spread premiums at the top of page two," of the federally
mandated Settlement Sheet required on all loans, says Bob
Chaplin, president of the National Association of Mortgage
Planners.
A lender offering a 7 percent, 30-year fixed-rate mortgage
at par might offer the same loan at 6.5 percent with 2 points,
and at 7.5 percent with a YSP of 1.5 points.
Unfortunately, borrowers don't always know when they are paying
the costs of a YSP until it's time to sign for the loan. The
broker must disclose the amount, but not until the HUD-1 Settlement
Sheet is prepared -- often just a day or so before closing.
Among other stepped-up RESPA enforcement actions, HUD would
like to change the policy and have brokers disclose the amounts
sooner, and brokers are seeking common ground to do so, but
the efforts haven't considered financial entities who comprise
30 percent of the market, fund their own loans and aren't
required to leave a paper trail amounting to hundreds of dollars
in consumer loan costs.
"My study indicates that the vast majority of borrowers pay
yield spread premiums -- on the order of 85 to 90 percent
of all transactions. Moreover, the average amount of yield
spread premiums is quite substantial, on the order of $1,850
per transaction," said Prof. Howell E. Jackson, a law professor
and associate dean of research and special programs at Harvard
University, testifying earlier this year before the U.S. Senate
Committee on Banking Housing and Urban Affairs.
Jackon's numbers were derived from his landmark YSP-damning
study "Kickbacks or Compensation: The Case of Yield Spread
Premiums", he prepared as an expert witness for the plaintiff
class in the YSP-related class action suit Glover v. Standard
Federal Bank, originally filed in U.S. District Court of Minnesota
and now before the Eighth Circuit Court of Appeals.
The study, an examination of 3,000 mortgages originated by
one group of affiliated lending institutions in the late 1990s,
is the most extensive empirical investigation of yield spread
premiums to-date, Jackson says.
The study, like HUD's recent enforcement actions was designed
to scrutinize brokers, but not lenders exempt from disclosing
YSPs.
That hasn't gotten by the National Association of Mortgage
Planners, a maverick group of brokers who say for years they
have disclosed YSPs effectively for consumers and now say
HUD's actions don't go far enough.
"Very large conduits are people who buy and sell mortgage
loans and in the first few days after a loan is made with
a lot of yield spread premiums that changes hands. That ought
to be disclosed too," the association's Chaplin said.
"I cheer HUD in its efforts to crack down. I'm very pleased
with some of the regulators in Texas who are really chasing
after the worst of the worst, but I am not optimistic that
rules will promulgate that are enforceable and that will require
full disclosure of every body doing residential loans. Somebody
has to get more sophisticated in defining disclosure laws
and ask the tough questions," Chaplin added.
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