Elimination of yield spread premiums
Consider an MLB arranging a RESPA loan. The MLB negotiates an interest rate for the loan in excess of the lender’s par rate, the rate at which lenders fund loans. In exchange, the MLB receives the dollar value of the yield spread premium from the lender, which was never disclosed to the buyer who will pay for it.
Later, the borrower discovers the MLB received the yield spread premium because of the interest rate negotiated for the loan. The borrower claims the yield spread premium is a kick-back, and in violation of RESPA since it was not a payment of a fee for any service rendered by the MLB.
The MLB claims the yield spread premium did not violate RESPA since it was payment for services rendered selling the loan to the lender, not packaging the loan for transmittal to the lender. [Culpepper v. Inland Mortgage Corporation (1998) 132 F3d 692]
Is a yield spread premium an illegal kickback and in violation of RESPA regulations?
Up until the Dodd-Frank TILA amendments, the legality of yield spread premium arrangements had been considered on a case-by-case basis since the terms and conditions under which a lender paid the broker a yield spread premium may or may not have been categorized as a kickback. [Culpepper v. Irwin Mortgage Corporation (2001) 253 F3d 1324]
The Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) now explicitly prohibit a mortgage loan broker from receiving any fees which are:
- calculated based on any terms of the loan other than the principal;
- from the borrower and any other source (read: the lender); or
- from the lender or borrower that are not disclosed to the borrower.
This puts receipt of the yield spread premium by an MLB outside the parameters of the law — illegal income. Most all borrowers are totally unaware of yield spread premiums being paid to MLBs in the first place, let alone the premium’s impact on what they will pay over the term of their loan. [15 U.S. Code 1602 §129B; for more information regarding consumer protection in the Truth in Lending Act, see the October 2010 first tuesday Legislative Watch.]
A shift in income generation for MLBs
The government has moved to correct consumer protection oversight and require strict, timely disclosure of all financial arrangements surrounding a mortgage RESPA loan transaction. MLBs will also have to meet rigorous endorsement regulations and educational requirements if they are to continue originating RESPA loans. [For more information regarding RESPA mortgage broker endorsement, see the July 2010 first tuesday article, Endorsement requirements for RESPA mortgage brokers.]
In the past, mortgage loan brokers have had incentive to negotiate loans with higher interest rates since they earn more compensation for themselves from lenders. Elimination of the yield spread premium as a source of MLB income leaves the MLB without conflict to seek out the best possible rates for homebuyers.
However, this also means earnings won’t be nearly as juicy as they were during the recent boom years with yield spread premiums that too often resembled a king’s ransom. MLBs could make upwards of $10,000 on a single RESPA loan transaction. Now, MLBs have an altered expectation of their income for individual loan transactions, and will need to handle a larger volume of loans to maintain their past income and living standards. Worse yet, loan amounts are one-half the amounts of loans originated in the 2004 to 2007 period.
In other words, MLBs who want to be successful will scale up their business to handle a greater amount of loans and receive less from each. The efficient and highly productive will absolutely survive.
Future business of loan origination
As the real estate market slowly creeps toward recovery and increasing employment inches consumer confidence upward, an increasing number of homebuyers will enter the market and need the MLB as an advocate to act as their agent and ensure they properly finance their home purchase or refinance at the best rate and charges available.
The role of an MLB is paramount in the reshaping of a more responsible and honest real estate environment redesigned to educate borrowers investing in long-term homeownership.
If anybody thinks this legistlation is helping the consumer is a fool. They just limit the consumer’s options. Let’s face it, brokers will NOT work for FREE. They will leave the business before they do that. But the consumers need them because they provide a valuable service. Go try to get a loan from BOA, then you know what I mean.
We always disclosed YSPs, on the GFE, California MLDS, and on the estimated HUD-1 and on the final HUD1. If any anybody claims YSP is a kickback, knows nothing and full of BS.
They did the same thing for the appraisals, thinking they will benefit the consumer or lender, but it is not because it reduced the number of comanies and it is becomeing almost like a monopoly. You have to work with one of the larger companies to get business. If anybody disagrees with me or have diffrerent feeling, please share.
These legistlations should be repealed to benefit the consumer. But is anybody listening? Simple GFE form became 3 page non-sense. When clients are looking at it, they are even more confused now then ever. It shows you how smart our legistlators are. They should have beta test the GFE before they made it into law.
Now it is even worse. Everybody is trying to over disclose so they are not stuck. It is still not accurate.
In my opinion,YSP should come back
Brokers should not give GFEs because it is non-sense.
Once the loan is locked, the lender or the escrow should send GFE or estimated HUD to the Buyer within 48 hours for Buyer to sign to accept the lock and clsoing expenses. Because by then you more or less know more about the accurate fees and expenses.
Appraisals should still compete for business.
Every file should have certain percent tolarance between appraisers opinion and automated evaluation.
Yes, there were and possible still are some bad people in our industry who not ethical and have no mercy. But this is not the way to deal with them.
Anyways, I was in starbucks and wanted to share my feelings with you guys.
Cheers.
As a prior underwriter and a long term Mortgage Loan Originator in California, I have always disclosed upfront all fees that will show on a closing statement. The fact that they now call it something else ‘credit for rate chosen’ makes no difference to me. Here is what I charge or make and here is what you pay – including the interest to payoff your current loan. This occurred because of all the ‘bad’ loan agents pretending those YSP were not really going to them. I still think what we do as loan originators can be much harder than a realtor (Which in CA I have to be licensed for) yet they make up to 3 times as much money. What about them? I like the flat fees also!
Who ever wrote this crap does not know a thing about how mortgage brokers work or get paid or how the new GFE works. What a biased bunch of bull this is. Please call me to get yourself educated on the issues.
This is worse than FOX so-called news. I am disappointed in 1st Tuesday for not fact checking this before publishing.
925-983-3023
yield spread premiums have also been based on the rate chosen. How could that be considered a kick back? It gives borrowers options such as not paying any fees, partial fees or full fees. I personally, with rates being what they are now, probably do more no-cost loans than any other type of pricing. It makes no sense, whatsoever, to completely eliminate borrower choises.
This new set of laws squashes competition amongst mortgage brokers and banks. To only charge a fee based on the loan amount is a silly and overly simplistic way of looking at the business, loan amount is not the only factor to consider. How much work does the loan take to close, should be the main factor in pricing a loan. And what about giving the borrower choices, which is what I have always done. I give borrowers the option, pay points up front or not. Let the bank pay me, or you pay me. I’ve always given options, YSP has to be disclosed now and in the last few years, and it’s not a kickback to choose one lender over another, if everyone is offering it as a way you can be compensated for originating loans. These new TIL laws will limit the options borrowers have to close loans, in different ways, that can better suit their situation.
RESPA changes which became effective January 1, 2010 made YSP obsolete new RESPA law requires the credit of YSP to the borrower. If the broker wanted to make money they had to charge points which then the credit covered.
In addition as a long time mortgage lender the YSP has always been disclosed on the HUD and the lenders instructions to a loan. In California the Mortgage Loan Disclosure Statement also required the disclosure for many years now. To say it was undisclosed and a kickback is simply wrong.