Home buyers have been asking me, “Is YSP illegal now with the new lending laws?”
My answer is, “No, not always; but in some instances, yes.” I’ll explain.
YSP (Yield Spread Premium) is extra money (a premium) that the wholesale lender gives to the mortgage broker for selling you a higher interest rate than par rate. That difference between par and the rate you get is the “yield spread.” Par rate is the lowest rate you can get without paying extra in points to buy down the rate. If you don’t want to pay any points, then you want par rate.
Back in the Wild West days of mortgage lending (pre-2010), mortgage brokers could make extra commissions by selling borrowers a higher interest rate than par rate. The higher the rate they were able to sell, the bigger their premium commission was. Thus, it became the goal of greedy loan officers to sell you as high a rate as they could, and a lot of smooth double-talk ensued.
This led a lot of folks — after they realized they had been taken advantage of — to ask, “How can they sleep at night?”
And their answer was, “I sleep very well at night, because I’m making a ton of money, thanks to naive people like you.”
Of course, the savvy borrowers who took the time to read Mortgage Rip-Offs and Money Savers could not be taken advantage of.
So back to the question, “Is YSP illegal now?”
To answer, I refer to the Press Release by the U.S. Federal Reserve in regard to the law enacted April 1, 2011. In short, it says:
* Individual loan officers cannot be paid a higher commission by the lender they work for if they sell a higher interest rate to the borrower. (This takes away the incentive to sell higher priced loans.)
* A mortgage broker cannot collect both an origination fee and YSP. (If the lender charges you an administration fee, application fee, underwriting fee, processing fee, origination fee, or any other lender fees, then it is illegal to collect YSP. Any YSP would therefore have to be given to you, the borrower, as a credit.)
* If the mortgage broker is not charging any origination fee or lender fees whatsoever, then there is nothing in the law that prohibits them from making YSP.
In this last case, YSP is not illegal, according to the interpretation accepted by most lenders.
Mortgage brokers have a choice: get paid by lender fees or YSP, but no more “double dipping” like before.
BUT WAIT, THERE’S MORE TO THE STORY!
Banks and direct lenders love to say, “We are a bank; we don’t have YSP.” True enough, but that is also deceptive. Instead of having YSP, they have SRP!
SRP stands for Service Release Premium. It is money the bank or direct lender gets paid when they sell your loan after closing. Federal law does not require them to disclose it, and they never will. If you ask, the loan officer will say, “I don’t know what it is.” Which may or may not be true, depending on the bank and the loan officer.
Mortgage brokers say the law isn’t fair. It targets them, forcing them to disclose and credit their YSP whereas banks and direct lenders get to deny and keep their extra profit hidden.
Another question people ask me is, “Is there still par rate?”
My answer is, “Yes. If you don’t need money credited to you by the lender to help pay closing costs, then ask for par rate. Also, if you don’t want to pay points (or a partial point) to buy down your rate, then ask for par rate.”
Where to Get More Information
For more information on YSP, how it is directly tied to the interest rate you get, and charts showing actual rates with YSP, see Homebuyers Beware. Also, you will read the one thing you should never say to a loan officer, how to ask for a cost estimate upfront without giving out your social security number, and how to negotiate the best priced loan.
Home buyer Ilya A. Mazo said, “I feel empowered after reading this book.” As the saying goes, knowledge is power.
Thank you for reading my blog. My purpose in writing is to help people avoid rip-offs and get the best loan possible.
