Dealing with yield spread premium abuse
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The line between correspondent lenders and true lenders can also be fuzzy.  A correspondent lender can evolve into a true lender by degrees, originating certain categories of loans at its own risk while continuing to originate others as a correspondent.

Because the different types of loan providers overlap each other in terms of their ways of doing business, any remedial legal actions taken against yield-spread premium and overage abuses should be transaction-based rather than institution-based. Rules directed at curbing yield-spread premium abuse should be applicable to any transaction in which there is yield-spread premium, regardless of the legal status of the loan provider involved.

What is yield-spread premium?
Mortgage brokers and correspondent lenders base their prices to borrowers on the prices they receive every morning from their wholesale lenders. These lenders price varying combinations of interest rate and points on every loan program they offer. For example, on a 30-year fixed-rate mortgage, they might offer the following:

30-year fixed-rate mortgage Rate Points 6.375 -1.625 6.25 -1.125 6.125 -0.625 6 0 5.875 0.875

For a rate below 6 percent, the wholesale lender expects to be paid points. For a rate above 6 percent, the wholesaler will pay a rebate. In common parlance, a rebate is a yield-spread premium when it is pocketed by a broker. In actuality, it is equally a yield-spread premium when it is pocketed by a correspondent lender.

How yield-spread premiums abet abuse
Suppose the loan provider aims to make a 1.5-point markup on this loan. If he puts his markup on the 6 percent loan, he must charge 1.5 points, which is cash out of pocket to the borrower, who may resist it for that reason. If the loan provider adds the markup to the 6.375 percent loan, in contrast, the borrower pays nothing out of pocket because the broker is paid the yield-spread premium by the lender.

Most borrowers are less resistant to a higher rate, which hits them in the future, than to a fee that must be paid at closing. As a result, most fees take the form of yield-spread premium.

Yield-spread premium compensation is not abusive if the borrower knows what is going on. A borrower dealing with an upfront mortgage broker is told what the broker's fee is and is given a choice as to how it is paid -- in cash or as yield-spread premium. The great majority of brokers, however, don't offer this choice because they can make more if they keep the premium to themselves. The borrower may learn about it in the documents he or she receives, but disclosure comes late and it is extremely unclear.