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Federal Bill Would Ban Yield Spread Premiums in Attempt to Stop Predatory Lending Practices

April 30, 2009

The House of Representatives is considering a bill to ban yield spread premiums, a common mortgage industry practice that critics believe gives mortgage industry insiders an incentive to exploit borrowers. According to HousingWire.com, the bill would ban compensation for mortgage brokers, loan officers or other loan originators, when the payment is based on the terms of the loan other than the principal. The goal is to stop the practice of paying loan originators more for bringing in loans with higher interest rates; brokers and others could still earn other forms of compensation. Industry insiders differ on whether the bill bans all yield-spread premiums or just some, but agree that it would substantially drive down the number of loans originated by third parties.

A yield spread premium is, in short, money a lender pays to a loan originator for making deals at higher interest rates than the borrower might otherwise qualify for. This might be easiest to explain with an example. Let's say the lowest interest rate a couple qualifies for is 6.5% -- but a mortgage broker offers them a loan at 7%. Setting the higher rate earns the broker a yield spread premium payment, calculated using the 0.5% difference between that lowest rate (called a par rate in the industry) and the interest rate the borrowers actually agreed to pay.

Yield spread premiums are a standard industry practice, and they are not necessarily wasted money. Mortgage brokers exist to help inexperienced borrowers land better deals than they might be able to find on their own and guide them through the paperwork and requirements. However, because the system pays more to loan originators when the yield spread premium is higher, it gives them an incentive to steer borrowers to higher rates. A yield spread premium on a high-cost "subprime" loan can be four or more times the size of one on a conventional prime loan. And mortgage brokers have no fiduciary duty to their clients, which means unethical ones are free to lie or mislead.

Borrowers who have no special real estate knowledge may not even realize that the yield-spread premium exists, or that they might qualify for a lower rate than they're offered. As with so many other aspects of the mortgage lending industry -- ethical and unethical -- this practice depends on borrowers' lack of understanding of the mortgage lending system. That's why, as Orange predatory lending attorneys, we like this bill. If the system gives people a financial incentive to exploit their clients but no accountability, dishonest people are going to appear -- and have already.

Borrowers should not have to have the knowledge of mortgage industry insiders to protect themselves from fraud and predatory practices. But if you believe you were lied to or misled when you took out a mortgage or refinanced your home, Howard Law LLP can help. Our Anaheim predatory mortgage lending lawyers represent homeowners who were locked into loans with undisclosed terms or fees, pushed into loans they didn't need or outright lied to. We can help you negotiate with your lender for a mortgage loan modification or, if necessary, take a predatory lender to court to nullify your loan and recover all of the illegal payments. To set up a free, confidential consultation with our Santa Ana predatory lending lawyers, please contact Howard Law online or call us toll-free at 1-800-872-5925.