Financial reform and your mortgage

Yield spread premiums
Yield spread premiums

The Dodd-Frank legislation prevents mortgage brokers from pocketing income from the lender and the borrower on the same loan. This rule protects consumers from abuses, but at the expense of restricting flexibility to choose creative loan terms.

Mortgage brokers are well-known for providing no-points, no-fee mortgages in which the borrower pays few or no closing costs. There's no such thing as a free lunch, so in exchange for paying little or nothing out of pocket, the borrower pays a higher interest rate.

Behind the scenes, it works like this: The lender pays the broker a commission for delivering a mortgage at a higher-than-par interest rate. This commission is called a yield spread premium, or YSP. Out of the YSP money, the broker pays all third-party transaction fees (for the title report, for example) and takes a cut for himself or herself. In some cases, the broker rebates some money to the borrower.

The legislation forbids brokers from collecting yield spread premiums while also charging borrowers discount points, origination points or origination fees.

This means you can't get a no-fee loan from a broker while at the same time paying discount points to bring down the higher rate.


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