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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2009

YSP Needs Your Support

The disappearance of this payment source would have drastic repercussions

The Federal Reserve Board's proposed changes to Regulation Z/the Truth in Lending Act (TILA) contained in docket No. R-1366 could harm the mortgage-brokerage business as we know it. The Fed will accept comments on the proposed change through Dec. 24 at sctsm.in/TILAcm.

Brokers have weathered ill-advised change after ill-advised change in the past few years and now face the specter of further harm at the hands of the Fed. The loss of yield-spread premiums would create many issues.

For starters, if brokers can't be paid based on the terms of deals they deliver to lenders, how are they going to be compensated? In many cases, brokers will have to charge borrowers greater fees. Many brokers make difficult deals happen for clients in need. Those deals can take months to close, and brokers must make a certain percentage per deal to stay in business.

In addition, the elimination of YSP would further tilt the playing field toward bankers, who could still receive premiums and income from marked-up rates sold to borrowers.

The loss of brokers ultimately will harm consumers, who will be faced with fewer loan options in a less-competitive mortgage market. In addition, the proposed rule could decimate the broker industry and render brokers unable to pay their loan officers. Thus, thousands of people could be out of work, with some signs pointing to Regulation Z changes as a factor.

YSP's advantages

When mortgage brokers complete a loan for a client, they buy the money at wholesale -- at the par rate -- and sell it to their clients at retail, thereby earning YSP. This keeps brokers from having to charge more money upfront, which borrowers often wouldn't be able to afford. The payment of YSP allows:

  • Brokers to make a fair amount for their efforts; and
  • Borrowers to complete a transaction that fits their needs.

If clients aren't satisfied with what a broker offers them, it's their responsibility to seek a better deal elsewhere. None of this changes brokers' need to pay for office space, insurance, audits, licensing and bond fees, etc.

Moreover, brokers who fully and clearly disclose their firm's compensation to clients must discuss with and disclose to borrowers their collection of YSP on multiple occasions, including on the:

  • Current good-faith estimate (GFE);
  • New GFE, which takes effect this coming Jan. 1;
  • Mortgage loan origination agreement;
  • Brokerage business contract;
  • U.S. Department of Housing and Urban Development (HUD)-1 settlement statement;
  • Attorney closing instructions that borrowers normally have to acknowledge; and
  • Regulation Z/TILA disclosures that lenders send to borrowers after application.

Brokers could say directly to clients: "I get paid by banks to place your loans with them. Many lenders compete over my business as a broker, and in some cases, they pay me to place your loan with them." By and large, clients don't care and won't care.

Time to act

Now is the time for everyone in the mortgage industry to fight the Fed's attempt to eliminate YSP. The Fed already more or less owns our banks and financial markets. Are we going to stand by and let them own us, too?

First, consider joining the National Association of Mortgage Brokers (NAMB). NAMB volunteers often are small-business owners, and they want our industry to thrive. The dues members pay to NAMB help fight for our interests in Washington, D.C.

Second, you must personally speak up. Comment on the proposed rule. When you do comment, make sure to explain the destructive impact the rule would have not only on the brokerage industry but also on consumers.

Third, educate your peers, business partners and clients about how the proposed rule will harm small businesses and consumer lending activity, and about how it will increase costs for consumers. Ask your partners and clients -- past and current -- to comment on the proposed rule. Note that without their help, your business and the opportunities offered by mortgage brokers could disappear.

Explain how self-employed borrowers could find themselves unable to get financing because of complex financial statements and out-of-the-ordinary income streams. Describe the risk of losing earnest money on time-sensitive purchase transactions and the perils of trying to close a loan through a bank employee with little to no vested interest in the transaction.

Beyond commenting to the Fed -- and encouraging people inside and outside the industry to do the same -- contact your elected officials. You can find your House and Senate representatives through house.gov, senate.gov and elsewhere.

Now is a challenging time for the mortgage industry, and brokers must do everything in their power to help keep things from getting worse. The consequence of not acting could be the end of your business.

•  •  •

No matter how you look at it, YSP helps keeps the mortgage industry viable. It underpins employment for thousands of professionals and allows mortgage consumers increased choice. If the government takes away YSP, it will hurt brokers and consumers and give banks an indirect bailout by eliminating their competition. In turn, the door will open for further abuses that harm consumers as the result of a lack of competition.

This abuse won't always be obvious, but it will be widespread. It will manifest itself in the form of poor customer service and reduced consumer choice, and it will be evident in the shunning of borrowers who need extra assistance because of a challenging property or damaged credit issues. Self-employed borrowers could face some of the biggest troubles. This would deepen the effects on small-business, one of the most-important growth engines in the U.S. economy.

Mortgage brokers and their employees provide a valuable service to consumers and the overall financial health of this country. The Fed's efforts to eliminate YSP should appall all brokers and cause them to speak up. If you don't, you'll have no one to blame but yourself.


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