I would like to discuss an area of mortgage lending that is fast becoming a hot point for litigation. It is called Yield Spread Premium or YSP (for banks, it's called a service release premium or SYP).

What's a YSP? It's a broker's income for raising your are above the PAR rate on brokered loans (or, in the case of a bank, the bank's income for increasing the rate on correspondent loans). One point of YSP is equal to one percent of the total loan amount.

Lenders use this as an incentive to brokers to bring them loans. The lender offers a PAR rate, or base rate that they are willing to offer the loan and the broker takes this PAR rate and adds his or her YSP to it.

How does the YSP end up costing you thousands of dollars in overcharges? Simply put, it's got everything to do with your mortgage broker disclosing what he or she is really charging you- both upfront as part of your closing costs, and in increased rate by way of a YSP. Many brokers tell clients that they are only charging some flat fee such as "broker fee", but never discuss the YSP. Don't get me wrong, I am not saying that YSP is defacto wrong. YSP is a very good tool in helping many mortgage clients, but it needs to be disclosed to the client up front.  

Many brokers are disclosing is the fact that they only charge 1% upfront but are not disclosing, and taking a large YSP. The mentality behind this is either "I want my clients to feel that they are getting a good rate and are not paying too much" or "What I get as a yield spread premium is paid directly to us by the lender, it doesn't come from the borrower's pocket."

For example, On a $400,000 loan amount, the broker charges 3 points (3% of the loan or $12,000). That raises the APR yield by .75% (one point of YSP adds 0.25%) you just raised someone's rate from 7.5% to 8.25%, you're making them pay $208 more per month than they should. Additionally, the broker charged a "broker fee of 1% ($4,000), document prep fee of $500 (junk fee) and application fee of $250 (junk fee), for a grand total of $16,750 for a loan three points above PAR.   

So how do a lot of mortgage brokers explain it when their clients spot the YSP on the Good Faith Estimate if they ever get one or the Final HUD-1? There are two columns on a GFE and a HUD-1 - debit and credit. YSP doesn't show up in the column of paid from borrower on the HUD-1. It is normally listed to the left side some where in the 800's (normally at line 812).

Don't get me wrong. There are advantages to the YSP. If you want to shell out less in upfront costs, or if you want what is sometimes  called a no-closing cost loan. There is no such thing as a no-closing cost loan, you have the option of having the lender pay some or all of your broker's fees by way of a YSP. The trick is in making sure that you know what that YSP is.