The Federal Reserve Nixes Yield Spread Premiums

Monday the Federal Reserve announced new rules banning yield spread premiums (YSPs).

The new rules (under Regulation Z) prohibit payments to a lender or broker based on the loan’s interest rate, they do allow for compensation based on a fixed percentage of the loan amount.

Yield spread premiums enabled mortgage brokers and lenders to earn additional fee income as a result of charging borrowers above-market interest rates.

Advocacy groups point to yield spread premiums as among the factors leading to the sub-prime lending morass.  The Federal Reserve’s stated purpose for the rule change (under Regulation Z) “is is to protect consumers in the mortgage market from unfair or abusive lending practices that can arise from certain loan originator compensation practices. 


Links:
Federal Reserve Statement
Article - David Streitlfeld, New York Times
Final Rule