What Is a Yield Spread Premium (YSP)?
A yield spread premium (YSP) is a form of compensation that a mortgage broker, acting as the intermediary, receives from the originating lender for selling an interest rate to a borrower that is above the lender's par rate for which the borrower qualifies. The YSP can sometimes be applied to cover costs associated with the loan, so the borrower isn't on the hook for additional fees.
As a result of legislation that was passed in 1999, the yield spread premium had to be reasonably related to the actual services the mortgage broker performs for the home buyer. The yield spread premium also had to be disclosed by law on the HUD-1 Form when the loan is closed. The 2010 Dodd-Frank Financial Reform Bill subsequently banned yield-spread premium altogether, a prohibition put into place to protect consumers after the 2008-09 financial crisis.
- A yield spread premium (YSP) is additional compensation paid to a mortgage broker as compensation for placing a higher-interest loan with a borrower.
- Any YSP will be listed on the HUD-1 form presented at closing.
- The yield spread premium is one of many fees associated with purchasing a piece of property or home.
- In 1999, legislation was passed, designed to protect homebuyers against exorbitant yield spread premium fees.
- In 2010, the Dodd-Frank Act banned the practice of the YSP.
How a Yield Spread Premium Worked
Mortgage brokers are compensated directly by borrowers when the borrower pays an origination fee when the lender pays the broker a yield spread premium or a combination of these. If there is no origination fee, the borrower is most likely agreeing to pay an interest rate above the market rate.
Paying an interest rate above-market rates to compensate a mortgage broker/lender is not necessarily a bad thing for the borrower, as it can reduce the mortgage's upfront costs.
There is no such thing as a 100% no-cost mortgage for the borrower. If a borrower does not pay closing costs or commissions, they will end up paying those fees spread out over the life of the loan in the form of slightly higher monthly payments.
Note that if a borrower expects to hold the mortgage for a short time, paying a relatively high-interest rate can be more economical than paying high fees upfront. A thorough cost-benefit analysis should be performed before any contracts are signed.
Par Rates and Mortgage Brokers
The par rate is the standard interest rate offered by a mortgage lender based on the terms of the loan and the creditworthiness of the borrower. This rate is free of any adjustments such as closing points, discount (mortgage) points, fees, or commissions.
When a homebuyer decides to work with an independent mortgage broker, the broker will be able to compare loans from a variety of banks and mortgage companies. For their work, the broker will be paid a commission. Instead of receiving a cash commission, many brokers instead receive compensation in the form of the yield spread premium, which is an adjustment upward in the par rate. All adjustments made to the par rate must be disclosed in the loan agreement and agreed to at closing in the settlement statements (the HUD-1 form).