Yield Spread Premium (YSP)

A yield spread premium (YSP) was a form of compensation paid to mortgage brokers by lenders when a broker placed a borrower in a loan with an interest rate above the lender’s par rate for which the borrower qualified. The excess yield—effectively an elevated interest rate—generated payment to the broker, which could be used to offset borrower closing costs or serve as the broker’s commission.

Key points

• YSP compensated brokers for delivering loans with interest rates higher than the par rate.
• Historically, YSPs had to be disclosed on closing statements (HUD-1) and be reasonably related to the broker’s services.
• The practice was banned under the Dodd‑Frank Act (2010) to better protect consumers.

How YSP worked

• Mortgage brokers could be paid by:
• An origination fee paid directly by the borrower, or
• A yield spread premium paid by the lender (or a combination of both).
• If a borrower avoided paying upfront origination fees, the broker/lender could be compensated by increasing the loan’s interest rate. The borrower then effectively paid the cost over time via higher monthly payments.
• There was no genuine “no‑cost” mortgage: waived upfront fees typically meant higher interest and greater total cost over the life of the loan.

Par rates and broker compensation

• Par rate: the standard interest rate a lender offers for a borrower’s credit profile without added points, fees, or commissions.
• Brokers compared offers across lenders and helped borrowers find suitable loans. Instead of direct cash commissions, brokers sometimes received compensation through an upward adjustment to the par rate (the YSP).
• All adjustments affecting the borrower’s cost were required to be disclosed in the loan documents and settlement statement.

Tradeoffs for borrowers

• Short‑term holding: Paying a higher interest rate (and no or lower upfront fees) can be economical if the borrower plans to sell or refinance soon.
• Long‑term holding: Higher interest rates usually cost more over the life of the loan than paying reasonable upfront fees.
• Borrowers should perform a cost‑benefit analysis considering expected time in the home, monthly cash flow needs, and total interest costs.

Mortgage brokers: benefits and drawbacks

Benefits:
* Save time by comparing multiple lenders.
* Potentially identify loans and terms a borrower might not find independently.

Drawbacks:
* A knowledgeable, diligent borrower can sometimes replicate the broker’s results.
* Brokers may steer borrowers toward deals that favor the broker’s compensation rather than the borrower’s best interest (a key reason for regulatory changes).

Origination fees

An origination fee is charged by the lender to cover processing and underwriting costs. It is negotiable to a degree, and borrowers can choose to trade higher upfront fees for lower rates (or vice versa), depending on their preferences and financial situation.

Regulation and consumer protection

• Late 1990s rules required YSPs to be reasonably related to services rendered and to be disclosed to borrowers.
• Following abuses revealed by the 2008–09 financial crisis, the Dodd‑Frank Wall Street Reform and Consumer Protection Act effectively prohibited yield spread premiums to reduce conflicts of interest and protect borrowers.

Bottom line

A yield spread premium was a way brokers were historically compensated by lenders through higher loan interest rates rather than direct fees. While it could lower upfront costs, it increased long‑term borrowing costs and introduced conflicts of interest. Regulatory changes have since banned the practice to better align broker incentives with borrower interests.