Dealing with yield-spread premium abuse
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The appropriate remedy for yield-spread premium abuse
is to require that premiums be credited to borrowers, who would
have to agree to sign them over to loan providers. This would empower
borrowers in negotiating fees and lead to better decisions about
the combination of rates and points that best meets borrowers needs.
Appropriate
legal remedies
This rule should apply to any transaction on which
the loan provider will deliver the loan against a firm commitment from another
firm to pay a rebate for the loan. The legal status of the loan provider, whether
broker or lender, should not matter. The appropriate remedy
for overage abuse is to make overages illegal. Lenders should be prohibited from
granting discretion to loan officers to price off the price sheet. Lenders should
be free to charge what they want, but they should not be free to take advantage
of ignorance and naivete to charge some borrowers more than others just because
they can. The proposed legal remedies should not be limited
to one group of loan providers. This is a matter not only of equity, but also
of effectiveness. The lines between these groups are not rigid -- especially the
line between mortgage brokers and correspondent lenders.
Brokers always have the option of joining lender groups
where they can operate pretty much the same way they do as brokers
except that their parent funds the loans. Many brokers have made
such a shift just to avoid the weak yield-spread premium disclosure
rules they face as brokers. Any tightening of the rules, if it applied
only to brokers, would result in a massive movement of brokers to
lender groups that were not covered by the rule.
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Jack
Guttentag is Professor of Finance Emeritus at the Wharton School of the University
of Pennsylvania. Comments and questions can be left at 
