Mortgage brokers and Broker Banks can enhance their profits by up-selling you on the interest rate you qualify for on your loan. A loan broker may talk you into taking out a mortgage for 6.5%, but you aren't aware that you actually qualify for a 6% loan and the broker sold you a 6.5% loan. Lenders pay Yield Spread Premiums to loan brokers when the borrower pays a higher interest rate than the best he could qualify for. The higher the interest rate, the higher the payment to the loan broker.
You probably pay your broker origination points for a loan in the neighborhood of 1% of the loan amount. Be advised that the broker can get an additional 1-1.5% of your loan amount for each .25% they overcharge you on the interest rate! That bonus is called Yield Spread Premium (YSP) when it's paid to a loan broker and Service Release Premium (SRP) when by a bank. The Yield Spread Premium can amount to being a payment to the lender for giving the borrower a worse deal. Note that in some cases, paying a slightly higher rate and allowing the broker to receive a Yield Spread Premium can benefit a cash-strapped borrower who doesn't want to pay an immediate brokerage fee. The Yield Spread Premium can then spread the cost of the broker's service over the life of the loan in the form of higher interest. Generally speaking, however, the consumer does not know they've been had by the lender.
Senator Dodd has introduced legislation that will prohibit steering borrowers to more expensive loans when they qualify for lower cost ones. That will eliminate the practice of giving YSP or SRP bonuses to lenders by eliminating the excessive cost to the consumer that results in the broker getting an undisclosed premium. His bill also provides for: a. Prohibiting prepayment penalties and Yield Spread Premiums in subprime loans., b. Requiring lenders to assess borrowers' ability to pay their mortgage after a rate reset if they are signing up for an adjustable-rate loan., c. Require lenders to verify subprime borrowers' income with documentation., d. Hold lenders liable for appraisals and for brokers' actions when the broker is paid based on Yield Spread Premiums. The legislation has been proposed, not passed.
Our Advice: Know what you are really qualifying and paying for with your new loan. Loan officers are very crafty when explaining away Yield Spread Premium when you question them about it. Yield Spread Premium is wholly unknown to most consumers so the loan originator never has to answer questions about it. When they are questioned about it, they either: 1. Play dumb, 2. Get angry, 3. Attempt to play down or explain away, or 4. are so caught off guard they stammer and sputter. Ask away and watch the response. Hopefully, you will have one of the many honest and good loan brokers in our area and can proceed confidently to funding knowing exactly what you are really paying.
Legislation can't always protect you. Pay attention when you conduct your business, you have a responsibility to yourself and your family to do so. Don't just be happy to get a loan - find out what you are getting and why.
Experience is Priceless! Lisa Wetzel & Jim Valentine, RE/MAX Realty Affiliates, www.carsonvalleyland.com, 775-781-5472.