Yield spread premium (YSP) was a term that dominated pre-crisis mortgage discourse. New MLOs entering the industry after 2011 may encounter it in historical context or in conversations with veterans of the business. Understanding what it was and why it was changed clarifies the current compensation structure under Regulation Z.
What Yield Spread Premium Was
Before 2011, when a mortgage broker placed a loan at an interest rate above the par rate, the wholesale lender paid the broker the difference between the loan's value at par and its value at the above-par rate. This payment was called the yield spread premium. HUD required it to be disclosed on the Good Faith Estimate as a dollar range. The premium varied based on how far above par the rate was, so a broker could generate more compensation by placing the borrower in a higher rate.
The Problem YSP Created
YSP created a conflict of interest: brokers were incentivized to steer borrowers into higher rates to maximize their compensation. This was identified as a contributing factor to predatory lending practices in the years leading up to the financial crisis. Borrowers had limited ability to compare whether they were getting a fair rate versus one inflated to generate broker compensation.
What Replaced YSP After Dodd-Frank
The Dodd-Frank Act and subsequent Regulation Z amendments effective April 2011 eliminated YSP as a separately disclosed item. The replacement framework requires brokers to choose either lender-paid compensation (LPC) or borrower-paid compensation (BPC) for each transaction, with the rate agreed upon in advance and applied consistently across loan types. Compensation cannot be received from both the lender and the borrower on the same transaction. Anti-steering rules require that borrowers be offered a loan without LPC as one of the presented options.
- ✦LPC: lender pays broker; rate is typically above par to fund the compensation; disclosed upfront as a fixed rate
- ✦BPC: borrower pays broker directly; rate can be at or below par; allows borrower to negotiate independently
- ✦Anti-steering: broker must present qualified loans that include a non-lender-paid option
Aria can walk through current Reg Z compensation requirements and help you structure compliant compensation disclosures for any loan scenario. Ask at vicariointel.com.
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