Dealing with yield-spread premium abuse
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Similarly, some correspondent lenders including upfront mortgage lenders reveal their rate/point offerings on their Web sites, where borrowers can make their own selections. Most of them don't, however. Further, while yield-spread premium disclosure requirements for brokers are poor, there are no disclosure requirements at all for correspondent lenders. Their deals with wholesale lenders are viewed as secondary market transactions, which are not subject to disclosure requirements.

Eliminating YSP abuse by eliminating rebates
Yield-spread premium abuse could be eliminated by making rebates illegal, but that is a bad idea. Rebates are a very useful option for borrowers who are cash-short and need help in paying settlement costs, including broker fees. It is particularly useful for borrowers who don't plan to be in their houses very long, and therefore won't be paying the higher rate, which is the quid pro quo for the rebate.

Overage abuses by true lenders
Lenders who do not receive yield-spread premiums originate loans at their own risk, to hold in their portfolios or to sell in the secondary market. Such lenders have loan officer employees who receive price sheets every morning, just like mortgage brokers. The difference is that the price sheets of the loan officers are those of one firm and the prices are retail rather than wholesale. The markup, including the loan officer's commission (usually about one-half of a point), is already included in the prices.

Taking the example above and assuming a retail-wholesale spread of 1 point, the loan officer's price sheet will appear as follows:

30-year fixed-rate mortgage Rate Points 6.375 -0.625 6.25 -0.125 6.125 0.325 6 1 5.875 1.875 5.75 2.5

With an acceptable profit margin already built in, these are the prices the lender will accept. However, the loan officer may use the rebate to generate an overage -- a price above the posted price. If the loan officer can get the borrower to accept 6.375 percent with no rebate, the lender makes an overage of 0.625 points, part of which goes to the loan officer.

Overages are the counterpart of the yield-spread premium of the broker or correspondent lender. Both are used to exploit the borrower's ignorance. In one case, the borrower is ignorant of the rebate paid by the wholesale lender to the broker or correspondent lender. In the other, the borrower is ignorant of the rebate the lender is willing to accept. Overages are not subject to any disclosure requirements.