YSP’s have gradually made their way into the American homeowners conscious, rising from relative obscurity. While this is progress, their use in relation to their intent is still misunderstood, manipulated, and maligned. Although more consumers are now aware that YSP’s are cash rebates Lenders pay for a borrower to accept a higher interest rate than they qualify for…this hasn’t stopped Brokers and Bankers from misusing them as a tool to subjectively and unjustly enrich themselves.
Even well educated broker/bankers can’t properly define YSP’s intended purpose per RESPA letter law. As explained in the RESPA Policy Statement, yield spread premiums should be proposed “as a valuable option that permits home buyers to pay some or all of the up front settlement costs over the life of the mortgage through a higher interest rate.”
In reality, YSP’s are shrouded within the complex structure of real estate settlement procedures to principally allow mortgage brokers and bankers the ability to impose higher prices on borrowers for their direct benefit.
Many broker/bankers will disclose YSP’s in a range of fashions, which may appear to protect the borrower, but appearances are deceiving. A prevailing practice among brokers is to enter a range of 0% to 5%, which leaves the broker with complete freedom of action, while providing the borrower with no usable information.
Other brokers won’t disclose YSP’s until closing, misleading borrowers to believe that the suddenly apparent dollar amount on the HUD-1 ‘is a fee paid by the Lender to the broker/banker for ‘delivering the borrower’. Under this explanation, payment of Yield Spread Premiums would run afoul of the first step of HUD’s test of whether YSP’s could be considered illegal kickbacks or rebates.
If the dollar value of YSP’s that end up in the broker/bankers pocket exceeds a fair value for services baseline, the transaction violates HUD’s test. What is this baseline amount? I don’t know…$3000, $5000, $10,000+ ? How could one justify $5000 in additional undisclosed compensation?
Charging broker compensation fees up-front and via improperly disclosed YSP can be viewed as a violation of TILA.
85-90% of all mortgage transactions contain YSP’s.
In almost all cases, they are never presented as an option, according to true definition.
They represent the largest source of compensation for mortgage brokers.
An overwhelming majority of borrowers do not need YSP’s to pay up-front settlement costs but are never offered otherwise.
‘This abusive form of price discrimination substantially increases the overall costs to borrowers, imposing a “hidden tax” on home ownership. Unfortunately, individuals who are less educated and less sophisticated about financial matters end up overpaying the most. The misuse of yield spread premiums affects prime borrowers, FHA borrowers, VA borrowers’**…all the way down the line. Even for those with the best credit, yield spread premiums can cost many thousands of dollars in increased financing costs.
The oft-maligned broker segment of the mortgage origination industry bears the brunt of these facts, while bankers can maneuver with perceived impunity, since they ‘are not required’ to disclose YSP. It would be interesting to see bankers held to black letter law and operate under more transparent conditions…rather it would be interesting to see how quickly they changed their business practices. Many in the industry don’t believe it’s anyone’s business what they make via YSP incentives. Their definition states otherwise. YSP’s belong to the borrower, not the 3rd party service provider.
The mortgage industry as a whole is a baseball toss away from moving to an overall transparent policy platform, via legislation, technology, or both. My $.02 says technology starts it and the legislators play pile on. At the end of the day, to not disclose has been rendered deceptive and predatory…words that have a clearly deleterious effect on doing business, whether they are legally reprimanded or not. If you think about it…to speak out against transparency in this marketplace is not the type of opinion consumers or legislators will come to appreciate.
The opening salvos have begun. There will be momentous battles with new weapons and strategies, but like most wars, no one comes out the clear winner, but the landscape will be changed forever.
**Proper Thanks to:
By Howell E. Jackson* and Jeremy Berry**
For U.S. Senate Committee on Banking Housing and Urban Affairs.