A Yield Spread Premium is, quite simply, money paid by a lender to a mortgage broker for bringing it loans that are "above par." The "par rate" is generally the interest rate for which a specific borrower qualifies. Above par loans are sold to consumers at a higher interest rate. An amount of money based on the difference between the par rate and the actual interest rate of the loan is paid to the broker. This is the yield spread premium.
These premiums generally range from $1000-$2000, but we have seen them go as high as $4000. Although YSPs are currently in a grey area of legality, the academic community and consumer rights attorneys have argued that these payments are totally unrelated to the services mortgage brokers provide and represent a financial incentive to misinform consumers. Basically, if a broker stands to make $1000 to $4000 more dollars on a transaction, why would he or she inform a consumer that a cheaper loan package exists?
More on YSPs to come as we develop our research base and seminar series.
