YSP - YIELD SPREAD PREMIUMS
Harvard Law - Kickbacks or Compensation YSP
http://www.law.harvard.edu/faculty/hjackson/pdfs/january_draft.pdfCenter for Responsible Lending -YSP
http://www.responsiblelending.org/issues/mortgage/ysp.htmlLenders email reveals YSP is a LIE!
http://integrityfirstmortgageinc.com/blog/wholesale-lender-email-reveals-the-yield-spread-premium-lie/What a Rate Sheet Looks Like-Broker Commissions YSP Based on these items
http://www.novellemtg.com/files/PayOptionArm.pdfWhat is a yield spread premium?
It's a tool lenders devised to compensate brokers. The problem is what it is compensating them for. A broker will tell you the lender will pay him so you don't have to. Sounds good. Huh. Well let's look a little closer. Why would a lender pay a broker so you don't have to. The borrower who chose to use a broker, did so because the broker was supposed to "shop" for them to find the best rate and terms among many lenders. In exchange, the borrower would agree to pay the broker a fee. A reasonable fee was 1% loan origination fee. If it is a big loan sometimes they would take just 1/2%. So on a $500,000 mortgage they would earn $2,500 to $5,000. If you shopped around you could negotiate with a broker as to what the charge would be.
This is a handsome sum considering what they do really requires very little work. Maybe they would spend a few hours working on your loan. If it had any issues maybe a few hours more. So if they could do at least four to five loans a month they were earning six figures. Pretty good. But now lenders were competing heavily for loans. You know all the pop up ads on every web site you visit. So many lenders sprouted up the market was crowded and competition got fierce. It should have been a good thing for consumers.
Brokers became the lenders telemarketers. They pushed hard for deals. The brokers were the lenders sales force all over the country. They didn't care how or who they sold loans to, just SELL SELL SELL, was the mantra. So lenders got aggressive. How could they get a particular broker to steer loans to them as opposed to other lenders. They came up with this ingenious plan. Not only would they offer them some money for steering customers to them, they would give them an extra incentive to charge a higher interest rate. The higher the interest rate, the addition of a prepayment penalty, etc, became financial incentives for the broker. The harsher the terms the more they got paid. So now the broker wasn't working for the borrowers best interest anymore, he was working for the lender. On a $500,000 he could earn $20,000.
I know because my broker earned $19,794 on my 584,000 loan. A separate sheet in the mound of papers I got said, Broker fee 0-25,000. I didn't even know what that meant. It wasn't on my Hud 1 Good faith estimate. It wasn't listed as a fee I would pay. So I barely glanced at it. It meant nothing to me. I never even asked about it. But to the broker it meant he could earn between ZERO and $25,000 depending on how bad he thought he could screw me. How smart or stupid I was. How much I shopped around for rates. How tired and stressed out I might be. How much he could hide until the last minute at closing. Legally the broker was supposed to tell me about the fee. To have an agreement with me that it is okay for him to earn this fee. Legally he wasn't supposed to get a YSP and charge additional fees on the HUD 1. But he did.
So, before a broker sells you up the river for a lenders kickback, affectionately known in the industry as a YSP, think twice. Even if you financed his broker fee of 1% ( I would negotiate a lower rate as the market is very slow right now) in the mortgage, you would pay a lot less over the term of your loan if you got a lower rate, no prepayment penalty and a fixed instead of an adjustable rate mortgage or the dreaded pay option arm loan. That's right you guessed it they got more money for selling those. That's why half the country is in them.
The moral of this story is the term BROKER, needs to be redefined into LENDERS ADVOCATE. Buyer beware. I'm not saying every broker is crooked. But that kind of money is hard to resist. And way to many of them took their money and ran with no regard to the borrowers.
My Opinion
YSP SHOULD BE INCLUDED IN THE FINANCE CHARGE APR
Finance Charges are to be included in the APR
1605(a) “Finance charge” defined
Except as otherwise provided in this section, the amount of the finance charge in connection with any consumer credit transaction shall be determined as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.
The finance charge does not include charges of a type payable in a comparable cash transaction. ( If the recordation tax for example was overcharged then the overcharge would be included in the APR as it was not an amount paid to a government agency)
The finance charge shall not include fees and amounts imposed by third party closing agents (including settlement agents, attorneys, and escrow and title companies) if the creditor does not require the imposition of the charges or the services provided and does not retain the charges. ( If the creditor is involved in any fee splitting then the fee should be included in the APR)
Examples of charges which are included in the finance charge include any of the following types of charges which are applicable:
(1) Interest, time price differential, and any amount payable under a point, discount, or other system or additional charges.
(2) Service or carrying charge.
(3) Loan fee, finder’s fee, or similar charge. (This is exactly what a YSP is.)
(4) Fee for an investigation or credit report.
(5) Premium or other charge for any guarantee or insurance protecting the creditor against the obligor’s default or other credit loss.
(6) Borrower-paid mortgage broker fees, including fees paid directly to the broker or the lender (for delivery to the broker) whether such fees are paid in cash or financed. (My argument is the borrower pays broker fees, even if they are in the form of a YSP, in the nature of a higher interest rate, prepayment penalties, higher margins, and other factors distributed on daily rate sheets. Broker gets a higher YSP on mortgage notes with adjustable rates and/or floating with indexes which most likely increase over the life of the loan. Some other factors YSP depend on is whether the loan is a first purchase mortgage money or refinance. Another, is whether it is a first position lien or a subordinate lien. So combining and refinancing is more beneficial to the broker but may have no benefit to the borrower. As is the case in many of these broker incentives. So my argument is these are financed broker fees over the life of the loan using the technique of hiding them in an item Paid out of closing (POC) YSP. Thereby avoiding adding them to the APR. In fact, they do cost the borrower much more then the original YSP over the life of the loan. A prepayment penalty would be extra on top of this when charged if loan is paid off in three years. So if you add that all up and include it in the APR-It would be a HOEPA loan.)
If you interpret (3) and (6) I don’t think it would be unreasonable to consider a YSP a finance charge and require it to be recorded as such in the APR. Along with prepayment penalties and other costs of harsh mortgage terms. If you could see the rate sheet provided to the broker for that day, from that lender and determine what compensation he got for giving you the specific terms you got, then any terms which were to your detriment that you did not have to get on your loan should be included in the amount this loan cost you.
For example on my loan:
The difference in the rate and terms on my refinance was was going to cost me over 1,000,000 dollars over the life of the loan. The terms were set because of the YSP offered to the broker. Not because they were in my best interest. The prepayment penalty if I sold my house would have cost me $15,000. The overcharge for recordation tax $966 was not in my APR because it was a fee paid whether it was a cash or a credit transaction. But it was a cost that should have been in the APR because it was not paid- it was retained by the title company which splits fees with the lender via Captive Reinsurance and other kickback mechanisms. So at the end of the day what did that YSP the lender paid the broker really cost me? 