• Yield Spread Premiums - If your loan officer can get you to pay a higher than market interest rate, they get a 'rebate' called a Yield Spread Premium. Here's what happens.  You agree to a 30-year loan at 6.5%.  Since interest rates change daily, your loan officer won't lock in your interest rate right away.  They will 'float' your loan until there is a little dip in rates and then they will lock in your loan - let's say at 6.25%.  Since your loan officer has you committed to pay 6.5%,  he/she will get an extra commission for selling you a loan at a higher than market interest rate.  These commissions are often in the multiple thousands!  An upfront and ethical loan officer would have rebated YOU the YSP or given you the 6.25% interest rate.  Since the lender is not required to disclose this extra profit to you until closing, you are none the wiser until it is too late to do anything about it. YSPs provide a useful option to some borrowers.  For those with little cash, YSPs make no-cost mortgages possible, on which settlement costs are paid by the lender.  For those who expect to be in their house only a few years, YSPs permit a favorable exchange of higher rate for lower fees.  BUT, in the hands of unscrupulous lenders, they can cost the borrow thousands and thousands of dollars.

How Can All This Happen?

Easily, unfortunately.  Mortgage brokers are regulated by RESPA and the Texas Savings and Loan Department, it's just tough to enforce the rules.  For example, RESPA requires that mortgage brokers disclosure their costs shortly after loan application in the form of a Good Faith Estimate and a Truth-In-Lending document.  The problem is, there is no requirement to actually DELIVER what they promised.  Consumer education is vital.