What are Yield Spread Premiums?
A yield spread premium (YSP) is lender-paid compensation a mortgage broker earns when delivering a loan with an interest rate above the lender’s par rate. The par rate is the base rate at zero points, meaning neither the borrower nor the lender pays or receives points at closing.
Loans below par typically require borrower-paid points, while loans above par generate a yield spread premium paid by the lender to the broker.
For brokers, YSPs remain a powerful way to structure competitive loan options, balance borrower closing costs, and secure fair compensation for their services.
Yield Spread Premiums for Mortgage Brokers
A yield spread premium is most associated with mortgage brokers. A mortgage broker does not directly fund a mortgage but instead shops multiple funding lenders to find borrowers a mortgage.
The funding lenders, also known as wholesale lenders, quote the interest rate they require on a loan (wholesale rate). Mortgage brokers have discretion to charge borrowers an interest rate higher or lower than the wholesale rate charged by the funding lender, so they effectively serve as a mortgage retailer.
If the mortgage broker charges an interest rate higher than the wholesale rate required by the funding lender, this is a yield spread premium. In this scenario, the mortgage broker receives a fee or commission from the wholesale lender for delivering a mortgage with an interest rate higher than the wholesale rate.
In this case, the borrower pays the higher retail mortgage rate, and the mortgage broker compensates the commission received from the wholesale lender. The higher the interest rate, the higher the yield spread premium, and the higher the commission the funding lender pays to the mortgage broker. However, the borrower pays the commission indirectly by paying a higher mortgage rate.
Origination Fees and Yield Spread Premiums
The mortgage broker also has the option to charge an origination fee to a borrower. An origination fee is compensation to the broker (or lender) for the expense of processing a loan application. Brokers can be paid through:
- Borrower-paid compensation — via origination fees or points paid directly by the borrower at closing.
- Lender-paid compensation — via yield spread premiums, where the lender pays the broker instead of the borrower.
For example, if a broker’s standard compensation is 2% of the loan amount, they might:
- Charge the borrower the full 2% in origination fees, or
- Charge the borrower 0% upfront and structure the loan rate so the lender pays the 2% via a YSP.
This strategy can make the deal more attractive to borrowers who want to minimize out-of-pocket closing costs.
How Are Yield Spread Premiums Disclosed to Borrowers?
Under the Dodd-Frank Act and CFPB Loan Originator Compensation Rule, brokers can still receive YSPs, but there are strict requirements:
- The borrower must agree to the broker’s compensation structure before locking the rate.
- The broker’s total compensation cannot vary based on loan terms other than the loan amount.
- The YSP must be fully disclosed in loan documents and settlement statements (e.g., the Closing Disclosure).
These rules ensure transparency and prevent conflicts of interest, such as steering borrowers toward higher rates solely to increase broker earnings.
What are The Benefits of Yield Spread Premiums?
Brokers typically receive payment in the form of “points” on a loan, yield spread premiums, or both. They pay these points in cash at closing, which means that on a purchase, the borrower must provide more cash at closing.
On a refinance, points paid in cash at closing usually mean the borrower receives fewer cash-out proceeds. A yield spread premium allows the customer to finance part of their broker’s compensation as part of the mortgage loan. The customer agrees to pay a higher interest rate, and in return for that higher interest rate, the lender agrees to pay the broker compensation in cash at or shortly after the closing. The borrower does not have to come up with the cash.
This is how it works with real numbers: Most brokers average 1.5% to 3% in compensation on the loans they originate. It varies by geography, loan type, and loan size. Instead of requiring their borrower to pay 3 points (3%) at close, for example, the broker could have the customer pay the broker 1 point at close with a higher interest rate. In return, the lender will pay the broker the 2 points.
How Yield Spread Premiums Appear at Closing
Any yield spread premium (YSP) will be listed on the HUD-1 form presented at closing. All adjustments made to the par rate must be disclosed in the loan agreement and agreed to at closing in the settlement statements—including the HUD-1 form.
Details of the fee are provided in the breakdown of costs at the time of closing, so borrowers can see exactly how much the broker is compensated and how it affects their loan terms.
This transparency ensures borrowers know whether they are paying points up front or financing the broker’s compensation through a higher interest rate.
Partner with Fortra Law for Compliance Confidence
For mortgage brokers, understanding and correctly implementing yield spread premiums can mean the difference between a competitive, compliant deal and a costly regulatory misstep.
If you have questions about structuring YSPs, meeting disclosure obligations, or defending against compliance challenges, Fortra Law’s industry-focused attorneys are here to help. Contact us today.
