What is: Yield Spread Premium

What is Yield Spread Premium?

Yield Spread Premium (YSP) is a fee paid by a lender to a mortgage broker in exchange for the broker securing a loan with a higher interest rate than the borrower qualifies for. This fee is typically expressed as a percentage of the loan amount and is paid by the lender to compensate the broker for bringing in higher-yielding loans.

How does Yield Spread Premium work?

When a borrower applies for a mortgage loan, the lender will offer them an interest rate based on their creditworthiness and other factors. If the borrower qualifies for a lower interest rate than what the broker can secure for them, the broker may choose to lock in the higher rate and receive a YSP from the lender.

Why is Yield Spread Premium controversial?

Yield Spread Premium has been the subject of controversy in the mortgage industry because it can incentivize brokers to steer borrowers into higher-cost loans in order to earn a higher YSP. This practice can lead to borrowers paying more in interest over the life of the loan than they would have with a lower interest rate.

Is Yield Spread Premium legal?

Yield Spread Premium is legal, but it is subject to regulation under the Real Estate Settlement Procedures Act (RESPA). The law requires that lenders disclose any YSP paid to brokers in connection with a mortgage loan, so borrowers are aware of any potential conflicts of interest.

How does Yield Spread Premium affect borrowers?

Borrowers may not be aware of the YSP being paid to their broker, but it can impact the overall cost of their loan. By accepting a higher interest rate in exchange for a YSP, borrowers may end up paying more in interest over the life of the loan than if they had qualified for a lower rate.

What are the alternatives to Yield Spread Premium?

Some lenders and brokers choose not to accept YSP and instead charge borrowers a direct fee for their services. This fee structure can be more transparent for borrowers, as they know exactly how much they are paying for the broker’s services.

How can borrowers protect themselves from Yield Spread Premium?

Borrowers should always ask their broker about any fees or compensation they will receive in connection with their loan. They should also shop around for multiple loan offers to compare interest rates and fees, ensuring they are getting the best deal possible.

Conclusion

In conclusion, Yield Spread Premium is a fee paid by lenders to mortgage brokers in exchange for securing higher-interest loans for borrowers. While legal, YSP can be controversial due to its potential to steer borrowers into higher-cost loans. Borrowers should be aware of YSP and consider their options when shopping for a mortgage loan.