I commented on the new Real Estate Settlement Procedures Act (RESPA) rules on a previous blog post. I now read that two lawsuits have been filed seeking to reverse or eliminate several rule changes contained in the re-written rules. The lawsuits have been brought by the National Association of Home Builders (NAHB) and the National Association of Mortgage Brokers (NAMB). The NAMB suit is over the new Good Faith Estimate (GFE) form, and the provision that requires the earlier disclosure to borrowers of yield-spread premiums paid by lenders to mortgage brokers.
So what is a yield spread premium? It is a payment to a mortgage broker by a lender for originating and processing a mortgage loan with a fractionally higher interest rate (called an above-par loan) than what the borrower would actually qualify for from the lender.
Mortgage brokers have been required to disclose the YSP as a fee "POC" (Paid Outside Closing) on page 2 of the HUD1 Settlement statement, not actually in the column titled "Paid from Borrower's funds at Settlement." This may be the first time the consumer has had any disclosure of the YSP and probably doesn’t understand what it truly represents -- that he/she is going to be paying more in interest than necessary.
Now, before you get all upset about the YSP concept as presently practiced, let’s review a few things. First, the mortgage broker needs to be compensated somehow for his/her services. The yield spread premium is one way. A second way is to charge the borrower fees when the loan is originated, such as origination fees, document fees, application fees, etc. One way or another the mortgage broker has to be paid or there will be no mortgage brokers. Yield spread premiums should reduce the fees the broker would normally charge to the borrower for a par-rate loan. The concept of YSP as a payment model is not nearly so controversial as the way in which it is applied, hence the new RESPA rules.
Secondly, let’s review an example of where the YSP concept (and paying a higher interest rate) may work to the borrowers advantage. Consider that the YSP reduces a mortgage’s (and the borrower’s) upfront costs. If the borrower expects to hold the mortgage for a short time, paying a slightly higher interest rate may be more cost effective than paying higher fees up front. Plus it helps the borrowers conserve their cash reserves.