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Mortgage Brokers Must Disclose Any Yield Spread Premium Accurately.

Yield spread disclosure is a requirement for mortgage brokers, but not for banks or mortgage bankers. This has been a bone of contention for nearly two decades since disclosure laws were first introduced. But why even disclose the YSP if it's the lender who pays it and not the borrower?

The Real Estate Settlement Procedures Act, or RESPA, was first implemented in 1974, with various updates since then. RESPA is designed to inform the consumer of all charges in a real estate transaction. If someone gets paid during the course of a sale or refinancing, then the consumer is required to be notified of every charge, and all those charges will be listed on the final settlement statement. These aren't necessarily limited to any charges that the borrower must pay. There can be fees for services at the closing that the seller will pay, for instance, but even though the borrower isn't paying them, all fees for services rendered will be itemized.

When a lender pays a mortgage broker a YSP, that's money changing hands, so it must be disclosed. The exact method of disclosure has evolved over the years, and for the longest time the mortgage broker would initially disclose on the Good Faith Estimate a potential range for the YSP, commonly noted as "Yield Spread Premium: 0-3%."

This meant that the mortgage broker was saying, "I might get some YSP, and if I do, it could be as high as 3 percent." Rarely was a dollar amount assigned in this disclosure; only a potential range was disclosed. When a borrower showed up at closing, the YSP would be listed on the statement. If the loan amount was $200,000 and the broker got a 3 percent YSP, that's $6,000, and that's a lot of money on a $200,000 loan.

Now, however, a broker must disclose the YSP more accurately and tell the borrower the amount of the YSP, if any, that she'll be receiving from the lender. Since this is only an estimate and it can change once the interest rate is locked in, if the YSP is higher when the loan is locked in than what was originally disclosed, then a new GFE must be generated.

In the meantime, the YS P is indeed a moving target. At the time you review your initial GFE, you might see a rate of 6.00 percent and a YSP of $500. But because rates can change throughout the day, the YSP on any particular rate is fluid. If rates go down slightly during the course of a day, the YSP will increase. For instance, that same 6.00 percent rate with $500 YSP might be 6.00 percent and $1,000 YSP at the end of the day. If rates have dropped during the time between your initial loan application and when you lock in your interest rate, you'll have the choice of taking a lower rate with the same $500 YSP or keeping your initial 6.00 percent rate with the higher YSP and applying some or all of that to your closing costs.

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