Fed Bans Lenders from Paying Yield Spread Premium to Brokers

The Federal Reserve announced several new rules like banning YSP loan commissions in an effort to minimize abusive mortgage lending practices.  The Fed actually said that mortgage lenders paying yield spread premium, also known as YSP led to the collapse of our housing sector.   The truth is that the Fed has had knowledge of broker paid commissions since it began well over a decade ago.  To say that the brokers charging higher rates on artificially reduced Fed rates caused the housing crisis is absurd.

Will Banning Mortgage Rebates Help the Mortgage Industry?

These new home lending regulations are part of the new financial reform legislation mandated by Congress.  The new rules apply to mortgage loan originators, brokers and loan companies, including banks and mortgage firms employing them. Under the new regulations loan originators may no longer be paid a increased commissions for suggesting one home  loan over another.

How will the YSP Ban Affect Your Business?

This is a devasting blow to loan companies that seek talented loan professionals.  As most of you know, loan officers were paid higher fees for charging a higher interest rate on mortgage to consumers over the last few years.  The fed is blaming the foreclosure crisis on mortgage brokers. 

 

Will this be the end of No Cost Mortgages? The rule change is intended to prevent loan originators from receiving higher compensation at the cost of damaging consumers.  Mortgage lenders can still continue to receive fees that are based on a percentage of the loan amount, however, which is common in the mortgage business.  Many loan originators have been sharing their yield spread premium commissions with their borrowers in an effort to reduce or even eliminate closing costs.  Where do you think no cost mortgage loans originated from?

Loan originators will also be prohibited from receiving compensation from both the consumer and another party such as a bank or mortgage company. Consumers were typically not informed that loan originators and brokers often received payments for their work from both parties. The new rule seeks to protect consumers who agree to pay the loan agents through a higher interest rate or through fees such as points charged up front on a mortgage are not paying more as a result.

The Fed said they are also instituting a rule prohibiting loan originators from directing a consumer to accept a home mortgage that is not in the consumer’s best interest in order to increase the loan agents’ compensation. The rule preserves consumer choice by ensuring that consumers can select from other home loan options, including loans with the lowest mortgage rate and the least amount of closing costs rather than loans that pay the originator higher fees.  The new YSP rules are set to go into affect April 1, 2011.

Does the Fed Have the Governing Authority to Ban YSP in all 50 States?

The Lead Planet believes that in a free market society in the US that charging a premium for your services is a great American virtue.  Better disclosures would have been a better solution rather than banning sales commissions to loan officers.  For now, we are reporting that once again our government has taken measures to strip some of our liberties. I don’t believe we have heard the end of this issue.

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Comments

The YSP was already banned for mortgage brokers and their LOs with the advent of GFE 2010. We now have to credit the YSPs against our buyers costs on page 2 of the GFE. So what’s the big fuss over the Fed banning YSPs? Doesn’t it know that HUD already set this system up for the mortgage broker segment of the business?

Is this ban going to stop mortgage bankers and banks from hiding YSPs on page 2 of the GFE, which they are now doing? They are still operating under the old YSP rule. If the new Fed ban accomplishes that, we’ll all be on a level playing field, which will be good for the industry. I’ll believe it when I see it on 4/1/11!