Was Your Yield Spread Premium Disclosed?
Article by Broderick Perkins
Even if mortgage brokers yield to pressure to make clear and timely disclosures of controversial yield spread premiums (YSPs), consumers will still have to contend with a substantial segment of the mortgage industry that doesn't have to disclose YSPs.
YSPs are points paid by lenders to brokers for loans carrying interest rates above a par rate -- a rate at zero points. (Points are expressed as a percent of the loan. Each point is typically one percent of the loan amount -- one point for a $100,000 loan is $1,000.). Conversely, on rates below the par rate, lenders charge the points to the borrower.
As an example of how YSPs work, let's say the price quote from the lender to the broker was 7 percent with no points. The broker offered the same loan to the borrower at 7 percent and 1.5 points, with the 1.5 points as the broker's markup.
By the time the loan is locked, however, market rates drop and the lender is now offering a YSP of 1 point for the 7 percent loan. The broker pockets the difference as income. The borrower may not discover the difference until closing, when it must be disclosed.
When borrowing from financial entities that fund their own loans, many consumers still won't know, on the average, they are paying $1,850 per loan to cover the cost of YSPs, according to an academic study of YSPs conducted by an expert witness in a YSP-related civil suit.
"Lender payments to mortgage brokers where mortgage brokers initially fund the loan and then sell the loan after settlement are outside the coverage of this statement as exempt from RESPA (The 1974 Real Estate Settlement Procedures Act ) under the secondary market exception," according to the U.S. Department of Housing and Urban Development's recent proclamation "RESPA Statement of Policy 2001-1: Clarification of Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers and Guidance Concerning Unearned Fees Under Section 8( b)".
HUD's statement was the opening salvo last year that began the new war against RESPA violators. RESPA, with HUD as its enforcer, is a federal consumer protection statute that regulates mortgage related fees and disclosures. Brokers largely have been the target of HUD's recent enforcement activities because they originate 70 percent of all mortgages and have been the target of approximately 150 YSP-related civil suits.
"The law says if you are a broker you must disclose yield spread premiums at the top of page two," of the federally mandated Settlement Sheet required on all loans, says Bob Chaplin, president of the National Association of Mortgage Planners.
A lender offering a 7 percent, 30-year fixed-rate mortgage at par might offer the same loan at 6.5 percent with 2 points, and at 7.5 percent with a YSP of 1.5 points.
Unfortunately, borrowers don't always know when they are paying the costs of a YSP until it's time to sign for the loan. The broker must disclose the amount, but not until the HUD-1 Settlement Sheet is prepared -- often just a day or so before closing.
Among other stepped-up RESPA enforcement actions, HUD would like to change the policy and have brokers disclose the amounts sooner, and brokers are seeking common ground to do so, but the efforts haven't considered financial entities who comprise 30 percent of the market, fund their own loans and aren't required to leave a paper trail amounting to hundreds of dollars in consumer loan costs.
"My study indicates that the vast majority of borrowers pay yield spread premiums -- on the order of 85 to 90 percent of all transactions. Moreover, the average amount of yield spread premiums is quite substantial, on the order of $1,850 per transaction," said Prof. Howell E. Jackson, a law professor and associate dean of research and special programs at Harvard University, testifying earlier this year before the U.S. Senate Committee on Banking Housing and Urban Affairs.
See Report: http://banking.senate.gov/02_01hrg/010802/jackson.htm
Jackon's numbers were derived from his landmark YSP-damning study "Kickbacks or Compensation: The Case of Yield Spread Premiums", he prepared as an expert witness for the plaintiff class in the YSP-related class action suit Glover v. Standard Federal Bank, originally filed in U.S. District Court of Minnesota and now before the Eighth Circuit Court of Appeals.
The study, an examination of 3,000 mortgages originated by one group of affiliated lending institutions in the late 1990s, is the most extensive empirical investigation of yield spread premiums to-date, Jackson says.
The study, like HUD's recent enforcement actions was designed to scrutinize brokers, but not lenders exempt from disclosing YSPs.
That hasn't gotten by the National Association of Mortgage Planners, a maverick group of brokers who say for years they have disclosed YSPs effectively for consumers and now say HUD's actions don't go far enough.
"Very large conduits are people who buy and sell mortgage loans and in the first few days after a loan is made with a lot of yield spread premiums that changes hands. That ought to be disclosed too," the association's Chaplin said.
"I cheer HUD in its efforts to crack down. I'm very pleased with some of the regulators in Texas who are really chasing after the worst of the worst, but I am not optimistic that rules will promulgate that are enforceable and that will require full disclosure of every body doing residential loans. Somebody has to get more sophisticated in defining disclosure laws and ask the tough questions," Chaplin added.
Copyright 2004 DeadlineNews.Com -- Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and consulting firm. Perkins has been a consumer and real estate journalist for more than 25 years.
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