What Is a Yield Spread Premium?
A yield spread premium (YSP) was a payment a mortgage lender made to a broker for placing a borrower into a loan with a higher interest rate than the borrower might otherwise have qualified for. In effect, the broker could be paid more for selling a costlier loan. The practice drew heavy criticism because it created an incentive that worked against the borrower's interest.
How a YSP Worked
- A borrower accepted an interest rate above the lowest they qualified for
- The lender paid the broker a premium based on that higher rate
- The borrower often paid through a higher rate over the life of the loan
Current Law
After the 2008 financial crisis, the Dodd-Frank Act and the Regulation Z loan-originator compensation rules effectively prohibited compensating a mortgage loan originator based on the loan's terms (such as the interest rate). As a result, traditional yield spread premiums are largely banned on consumer mortgages today. The term still appears in older loans and in discussions of how broker compensation is now disclosed and regulated. Florida borrowers benefit from these federal protections alongside state lending laws.
Related Terms
- Mortgage — The loan a YSP related to
- Title 15 U.S.C. — Home of federal consumer-credit law
- Prepayment Penalty — Another restricted loan feature
Barnes Walker Real Estate
Barnes Walker's attorneys review loan terms, disclosures, and broker compensation issues for Florida borrowers. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC