I believe that the term Yield Spread Premium, "YSP", has led too much of the confusion and
debate. The issue that must be the sole focus is to help consumers make the best choice available
and to effectively shop and compare mortgage terms.
Studies citied by the Federal Reserve Board and other government agencies have shown that the
disclosures do not achieve the objective of improving the consumer's comparison shopping. The
result of this misconception about YSP has led to a new Good Faith Estimate that goes into
effect January 01, 2010. The new Good Faith Estimate will actually reduce the consumer’s
choice and decrease transparency and force originators to quote higher costs which will eliminate
The proposal is based on a misconception that a premium given for a certain interest rate versus
another represents a kickback or rebate instead of the net present value of the future revenue. By
continuing to focus on how mortgage lenders utilize this net present value of their future revenue
stream the Board has lost focus on the main goal which was to create simple, clear mortgage
shopping and comparison tools.
The lender is compensated from the mortgage loan through a combination of the closing costs
and from receiving payments or releasing the right to receive those payments to a third party.
There are numerous costs associated with mortgage loans: marketing, origination, processing,
underwriting, licensing, bonding, compliance, administrative, servicing, collection, credit risk,
and a little profit. No matter who performs the task or originating a loan whether the lender or
some other third party, i.e. mortgage broker, the consumer will ultimately pay for the costs
associated with the loan through either closing costs or the interest they pay over the life of the
loan. This has been completely lost in the continuous debate over Yield Spread Premium.
Lenders were able to expand their reach through the use of 3rd party mortgage brokers, and loan
originators. This gave lenders a way to get mortgages using variable costs rather than fixed costs.
The lenders offer rate sheet which are very similar to price sheets you would see in many other
wholesale industries. This rate sheet shows what the lender will pay which is represented of their
defrayed fixed costs into variable costs through 3rd party mortgage brokers. The rate sheet
reflects the lenders price in the form of an interest rate. The consumer will pay the lender through
a combination of closing costs and their interest payments over the life of the loan. The lender
then uses that revenue to pay for the aforementioned expenses. Obviously, a higher interest rate
the lender will receive more revenue, and they could therefore pay the loan originator or 3rd
party mortgage broker for the services they have provided to both the lender and the consumer.
This in no way HIDES anything from the consumer or hinders the comparison shopping process.
It must be noted here that the YSP received has always been required to be disclosed to the
consumer on all transactions through a mortgage broker.
Lenders have made a business decision to manage their origination costs by utilizing 3rd party
mortgage brokers, instead of expanding their limited resources to increasing their own costs
through growing staff internally. By restricting a business ability to make the important decision
of whether they must "Build" their own resources or "Buy" causes damage to businesses and
specifically the lenders access to 3rd party mortgage brokers, and will result in reduction of
competition, and ultimately lead to higher costs. This will shift the overall costs of the loan from
a combination of closings costs and interest payments over time to just INCREASED front end
costs creating a void where many consumers can no longer afford the dream of Homeownership
and creating problems for those looking to refinance.
The proposed Regulation Z change shows the misunderstanding surrounding loan pricing. The
Board expressed their concern, "that creditor payments to mortgage brokers are not transparent
to consumers..." comes across that there is no issue if all lenders where to raise interest rates.
This increase in interest rates would not require any justification, but would be an increase in the
largest driver for the consumer of the total cost of borrowing. If the originator is an employee of
the lender this higher interest rate does not need to be disclosed to the consumer even though the
higher interest rate will result in a higher interest payment and "Premium" to the lender when the
loan is placed into a loan pool or when the loan is sold off.
All lender and loan originator compensation is included in the front end cost and the monthly
loan payment arrived at from the term of the loan and the Note interest rate. The interest rate is
disclosed to the borrower, as well as the fact whether the interest rate is fixed or variable.
Additional disclosure to the consumer of the lender's revenue used to pay for services rendered is
immaterial to the consumer's ability to compare loan products.
The Board could better serve the objective of Regulation Z and consumers by dropping the
rhetoric about "indirect compensation" and by focusing their attention towards working
meaningfully with HUD to integrate the requirements of Regulation X and producing one set of
disclosures. The outcome must be based on a simplified consumer disclosure that helps
comparison shopping based on relevant product and financial information.
I suggest a one page addendum to the existing Good Faith Estimate (pre January 01, 2010). With
the true objective defined as enabling comparison shopping there are only 2 things necessary to
1. The front end costs associated with obtaining the loan, all of them, not just those deemed to be
pre-paid finance charges.
2. The interest rate, and the total cost of the loan over time.
Assuming consumers base their decision on price then everything becomes completely
transparent with those two items.
I feel that if the Board and HUD do not deal with the misconception of YSP and indirect
compensation, the disclosures forced on consumers will continue to cause confusion, and hinder
the ability to develop a meaningful solution.
Jeremiah M. Wean
Lakewood Lending Group, LLC
Example Comparison Shopping Disclosure to be combined as an addendum to the Good Faith
Estimate (pre January 01, 2010):
Total Loan Amount: $150,000 Loan 1 Loan 2
Term: 360 Months
Interest Rate: 4.875% 5.25%
P&I Payment: $793.81 $828.31
Front End Closing Costs:
Origination Fee: $1,500 $0
Lender Fee: $650 $0
Title Fees: $950 $0
Escrow: $2,000 $2,000
Total Front End Closing Costs: $5,100 $2,000
Total Cost to Consumer: Loan 1 Loan 2
Total Cost After: 36 mos. $33,677 $31,819
Total Cost After: 60 mos. $52,729 $51,699
Point Where Both are Similar: $76,543 $76,574 90 MONTHS
Total Cost After: 120 mos. $100,357 $101,397
Total Cost After: 240 mos. $196,694 $200,794
Total Cost After 360 mos. $290,872 $300,192