Yield Spread Premium (YSP)
Definition and meaning of Yield Spread Premium (YSP) in real estate.
Yield Spread Premium (YSP) is a fee paid by a mortgage lender to a mortgage broker for originating a loan with an interest rate higher than the par rate, which is the lowest rate for which the borrower qualifies.
In more detail
This premium historically allowed brokers to be compensated for their work, and borrowers could use it to offset upfront closing costs by accepting a higher interest rate. However, this practice often led to conflicts of interest, as brokers were incentivized to steer borrowers into higher-rate loans to increase their own compensation.
Following the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act led to strict federal regulations that banned lenders from paying brokers compensation based on the interest rate or other terms of the loan. Today, mortgage brokers are compensated through other structures, such as a flat fee or a percentage of the total loan amount, which must be clearly disclosed to the borrower.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | YSP, lender-paid broker compensation |
| Current legal status | Banned under federal law for most residential loans |
| Watch out for | Higher long-term interest costs when accepting rate-based broker credits |
A home buyer qualifies for a mortgage at a par rate of five percent, but a broker offers a rate of five and a half percent, allowing the broker to receive a yield spread premium from the lender.
Frequently asked questions
Is Yield Spread Premium still legal in the United States?
No, federal regulations implemented under the Dodd-Frank Act banned lender payments to mortgage brokers based on the loan's interest rate or terms.
How did YSP benefit home buyers in the past?
Borrowers could use the premium to cover upfront closing costs by agreeing to pay a higher interest rate over the life of the loan.