End of Month Fireworks: LOE's and YSP's

(LOE) Letter of Explanation:

Can a loan officer draft their own letter of explanation (typically to explain issues on a credit report or some other circumstance) on behalf of the borrower? Is this ok, ethical or worse, fraudulent. If they can draft the letter and the borrower signs it, is it acceptable at that point? If underwriting became aware of this, even though the borrower signed the form indicating that it is a true statement, would that fly? My wife and I are arguing over this, but we don’t know the answer.

YSP (Yield Spread Premium):

There may be some agents that do not understand this, so I’ll let the loan officers explain its meaning and various uses.

Recently, a borrower at a signing was given a brutally clear disclosure/explanation of the YSP as part of their loan package. It disclosed how the YSP could be used to assist the borrower in paying for closing costs, or buying down the interest rate or used as additional compensation to the loan officer for INCREASING (this “increasing” verbage was on the disclosure and not used here for effect) the interest rate over what the borrower could have received. This disclosure actually stated the interest rate on the note and the specific amount of the compensation going to the broker over and above the 1% loan origination. I’ve never seen such a clearly explained YSP disclosure. Many lenders do not have a YSP explanation disclosure as part of the loan documents.

Did the disclosure or the loan officer (LO) kill the transaction (with borrowers who had sterling credit, pushing the envelope with a 3 yr. pre-pay penalty AND the YSP)? I really would like comments because my guess is that the LO will blame the lender. In this case, the borrower was highly concerned (there is a better word for it , but concerned will do) and promptly called the LO to discuss the situation and I’m speculating that the conversation also touched on why this disclosure was not given when they made loan application or on the GFE. The borrowers promptly signed the rescission and left. Although I am somewhat aware of up-front disclosures on the lending side, perhaps someone in the business could shed light on this. Obviously, you cannot know loan fees until the lender, loan program and interest rate is chosen.

Lastly, should any escrow firm be entitled to a full escrow fee for fulfilling their job and recovering any third party fees incurred during the escrow period? Any escrow/title/attorney folks want to comment on that?

168 thoughts on “End of Month Fireworks: LOE's and YSP's

  1. Tim,

    I’m confused. Why wouldn’t the buyer just get a different lender? Why would the seller release their Earnest Money in this situation?

    As to the lender helping to write a letter, as long as the information in the letter was provided by the buyer, I don’t see the problem.

  2. Gutsy post, my friend. Very gutsy. I can’t wait to read the comments. I will say this: most of the time the YSP is sheepishly hidden on the HUD without being boldly disclosed to the consumer. It’s just my opinion, but most borrowers have no idea what a YSP is and should. It’s wrong that they don’t. I applaud your borrower for walking and feel strongly that the LO should reimburse you. The YSP disclosure didn’t kill this deal; it was caused by the LO’s failure to be completely honest with the consumer. The YSP is a skeleton in the closet that needs to be discussed. Thanks for this post.

  3. I’m confused. If a client is happy with the terms they are receiving (loan program, interest rate, fees), why would they care how much the lender is paying to the LO in the form of YSP?

  4. Jonathan
    It’s more than a simple case of the borrower being happy with loan terms. Consumers have a right to know how much they’re paying and to whom. At the very least, the ($ amount of YSP + other fees) can be used a point of comparison when shopping lending sources. The YSP is being used by many LO’s to keep consumers in the dark.

  5. Tim, you’re addressing so many points in just one post! As the newly licensed Loan Originator #510-LO-32047, I’ll take a swing at this.

    The Credit Letter. In my professional opinion, the borrower may verbally tell the LO what their circumstances were that caused what ever glitch in their credit to warrant a credit letter. A LO should not create a credit letter to paint a picture that is untrue for underwriting purposes.

    YSP. Brian Brady has excellent post on this matter http://delmar.typepad.com/brianbrady/2006/11/a_realtors_guid.html

    Here’s my take on it. I’m a Correspondent Lender and a Broker. When I broker the YSP or SRP (Service Release Premium) is disclosed to the borrower. Regardless of if I’m providing the mortgage in our credit line or brokering, I factor the YSP/SRP into the rate. The consumer receives the benefit. We all know that mortgages can be priced anyway a consumer prefers (0 pt, 1 pt, no closing costs, etc.). It is the responsibility of the loan originator to explain pricing to the borrower and provide them with their options.

    If the consumer shops and compares rate to closing costs (how to shop requires a new post as well), then what the Loan Originator is being paid should not be an issue. If they receive the best rate at the lowest cost—they win.

    The LO did kill the transaction and the borrower did the right thing! Loan originators can also receive higher compensation with prepayment penalties. There are times with subprime loans when the lender does not have the option to eliminate the prepay. Again, if there is an option to cash it out (price it into the loan) I always inform the borrower of that option. When it’s a Subprime loan, the borrowers I work with have always opted for the prepay to have the lower rate (again, I give them the benefit). There are A Paper products where if the lender adds a prepay they have padded their pockets—which unless this is agreed to by the borrower and there’s some reason for it (I can’t imagine what it would be) it’s disgusting. I’m completely anti-prepay.

    This is where a consumer should spend more time shopping for the right individual to work with to handle the financing of their home instead of so much focus on rate shopping. If the lender is ethical, educated and dedicated to their clients, they will automatically receive the best rate. The challenge is, as you experience day in and day out (I use to be in escrow), the greedy, unknowledgeable LOs outnumber the good.

    Regarding compensation. In a perfect world, we all would be compensated for work performed. There are times I wish I was paid hourly or as a consultant or financial planner. I have buyers where it takes them years to buy and they call or email me constantly. It just doesn’t work that way.

  6. Ed,

    I understand that the borrower should know their options and those options include a higher rate (more YSP to the LO) with lesser fees/costs vs. lower rate (less YSP/No YSP to the LO) and higher fees.

    But that’s more of a conversation about loan options than YSP.

    For example, isn’t it just as bad if a LO doesn’t explain interest-only options, ARM’s, buy downs, etc with their client?

    I’m all for full disclosure on the front-end, however, it seems that “YSP” is singled out — when it’s no more/less important than a lot of other factors.

    How can YSP be used to compare lending sources?

    For example, If I get you a 30 Year fixed at 6.0% and the lender pays me $4,000 in YSP and another lender can get you 6.125% with the same amount of fees but the lender only pays them $3,500 — are you really going to compare how much I’m getting paid or will you be happy with the lower rate?

    Also, since banks are not required to disclose YSP, how would you compare a broker quote a bank quote when it comes to YSP?

    Also, can you elaborate on how many LO’s are using YSP to keep consumers in the dark? I’m not sure I understand?

    I hope to learn a lot from this conversation….


  7. Jonathan,
    Thanks, I was trying to figure out if you’re a super savvy consumer or a lender! 😉
    You make an excellent point regarding comparing YSP.

    “Also, since banks are not required to disclose YSP, how would you compare a broker quote a bank quote when it comes to YSP?”

    Comparing lender closing costs to rate is the only way to shop rates when all the various lending sources disclose differently. This is one reason a consumer should never shop by APR.

    There are so many post about YSP these days…check out AR.

  8. The borrower read the disclosure in the paperwork to be signed and it indicated that the interest rate received was “an INCREASE” over what they could have received otherwise and that the YSP was going to the broker and not being used in this case to buy down the rate or apply to closing costs. It was quite the disclosure. Whether the increase of interest rate was only an 1/8th, or 3/8th’s was moot. The point was that with good credit scores, this disclosure triggered scrutiny by the borrower, and, with all things considered, including the 3 yr pre-payment penalty, they walked.

    I’m presuming that the borrowers were discouraged that the LO did not get them the very best terms possible. It’s my belief that the broker would have had a happy customer (a long-term customer) if they utilized a large YSP to assist the borrowers with closing costs or buying the rate down. Instead, the borrower will be out some third party fees and will probably go shopping somewhere else for financing. Darn shame if you ask me. Completely preventable.

  9. Rhonda,

    Thanks for explaining this. You have a super perspective because you have been in escrow.

    Do you feel that an LO should actually draft the LOE letter? This is what my wife, Lynlee, and I are arguing over.

    To clarify, the LEO issue is a different issue and has nothing to do with the borrowers who walked because of the YSP thing.

    I understand the Active Rain community has discussed this YSP issue, but it’s largely a community for insiders. Where are consumer eyeballs? How do consumers know how to utilize YSP’s to their advantage? Do LO’s show people how they can benefit from YSP’s at loan application? Or do LO’s not discuss it?

    Rhonda do you really sense that “as you experience day in and day out (I use to be in escrow), the greedy, unknowledgeable LOs outnumber the good.” ?

  10. Jonathon,

    I’m hearing that there is quite the lending industry internal civil war going on because the direct lenders/bankers are making robust back end profit, but do not have to disclose it. Yet, the brokers do have to contend with it being disclosed on the HUD, just not in the borrower expense column.

  11. Tim,

    I hear about the same internal civil war, however, it’s never really impacted me. I don’t mind having to disclose YSP even though banks don’t. I actually point out the YSP to the client at closing (even though it’s often somewhat hidden on the HUD). I want them to understand the process and see how some of their closing costs are getting paid — and how I’m making my living. It helps them understand the process and feel more comfortable referring others to me down the road.

    With regard to the following question you posed to Rhonda, “do you really sense that as you experience day in and day out (I use to be in escrow), the greedy, unknowledgeable LOs outnumber the good.” — In my experience most LO’s mean well — they are just improperly trained or incompetent. Many of the issues that pop up throughout the loan process or at closings are not so much because someone is greedy or unethical — but rather they didn’t do their job well or didn’t know better.


  12. Jonathan
    I have no problem when YSP’s are disclosed to the consumer in advance. This is particularly true when a case requires a great deal of work like when the borrower has credit issues or needs to have a part of closing costs covered. My problems stem from situations similar to Tims where an upfront discussion presenting options could have resulted in an easy closing. I feel that a consumer in a real estate transaction has a right to know everything. The YSP should not be a surprise at the table.

    I did closings for 20 years and first heard of the YSP during the mid 1990’s. It’s clearly a touchy issue for closing agents as disclosure has been known to kill deals. I’m very much in favor of the disclosure mentioned in Tims post.

    Tim do you agree or disagree with it’s use, I’m curious?

    The implication concerning a banks lack of disclosure requirement is valid. There is no way for a fair comparison in that instance.

  13. Tim, I’m going to respond in two separate comments to your two comments. 🙂

    As a Correspondent Lender, YSP is not disclosed but since my practice is to factor it into the rate—that’s a moot point for me. I am passing it onto the consumer. I have only worked for one company in my mortgage career and I know of no other way of doing this. All of the YSP press is amazing to me. Bottom line, as I said before, the consumer needs to make sure they are: (1) working with a professional, ethical and knowledgeable lender and (2) shop rates and closing costs secondly. If they have found the best rate in the world but their LO is a schmuck who doesn’t honor it, then what’s the point? I recently did a post on how to shop for a lender: http://www.mortgageporter.com/reportingfromseattle/2007/01/how_to_pick_a_l.html

    The 3 year prepayment penalty is a much larger issue, assuming these clients had excellent credit.

    This reminds me of one of my clients who shopped me and went to another lender who quoted a better rate. They called me from the closing table when the product was an ARM (they were quoted a 30 year fixed) with a prepay. These clients are stellar—I wish I could clone them. They walked and I closed their purchase. I actually kept their file on my desk ready for this…I knew this lender would not have the rate he promised at that time—he was gambling the market.

    How do I as a Loan Originator convince rate shoppers that some lenders are unethical? “Oh yah, she might be quoting you a lower rate, but she’s a liar!

  14. Tim,

    “Did the disclosure or the loan officer (LO) kill the transaction (with borrowers who had sterling credit, pushing the envelope with a 3 yr. pre-pay penalty AND the YSP)?”

    This sentence caught my attention, as you’ve raised the issue of high credit score or “sterling credit” with bad loan terms before.

    1) How does escrow know the buyer’s credit score?

    2) In my experience, credit score alone doesn’t dictate rate and terms. Rate is higher for stated vs. documented for example. Rate is higher for jumbo stated, vs conforming documented and prepayment penalties and high rate can be about ratios being high due to income and debt considerations. Everything is not simply credit score driven.

    And I still don’t see how the buyer had a legal “out”, since it would appear that Seattle is one of the only places in the county that I’ve seen, that doesn’t have a rate cap in the Finance Addendum.

    I wonder if we can start a consumer group to fight for advances in consumer disclosure issues here in the Seattle area? Is there one now that I can join? Does anyone know of one anywhere that we can emulate in starting a group to fight for better consumer disclosure and practices when buying and selling property?

  15. “With regard to the following question you posed to Rhonda, “do you really sense that as you experience day in and day out (I use to be in escrow), the greedy, unknowledgeable LOs outnumber the good.

  16. Is this a purchase or a refi? With a refi, the borrower has a 3 days to walk from the refi.

    With my scenario that I mentioned, it was a purchase. We closed it in 4 days (I don’t recommend that for anyone!) and did the appraisal after closing (new construction) to follow the PSA. Luckilly, I kept the clients file on my desk when the opted for the slimy LO who quoted the lower rate.

  17. Regarding the credit LOE, as I mentioned above, as long as the letter is factual, then I think it’s fine for the LO to draft it. I often do or I’ll have my processor prepare the letter. I ask the client during the consultation about their credit history and help by preparing the letter. My client reviews the draft and makes any changes they want. We are not writing anything untrue, it is totally their words. I don’t always do thisEFORE closing. I’m not seeing as many LOEs (knock on wood) as I use to.
    If a LO is writing a credit letter that is untruefor their clients to create a scenario the u/w will buy off on–then that’s wrong.

  18. Rhonda
    I just took a couple of minutes to read Brians post about the YSP and agree that it’s very good. It seems to me that a borrower who agreed to a higher interest rate to cover broker fees should have no problem at closing. In Tims case, it sounds like the shock factor opened a can of worms.

    I’m curious, how do you feel about the YSP disclosure that Tim mentioned in the original post?

    PS – Thanks for linking to Brians post.

  19. Rhonda
    Thanks for being so honest about the ratio of improperly trained LO’s versus those who have the experience and ability to handle most any situation. I feel the ratio is similarly skewed in the title industry. Earlier, I refered to Tim’s post as being “gutsy” because I find it difficult to even discuss the YSP at seminars. Last year, I brought it up at a lecture in Norfolk and was verbally attacked by a First American attorney. I learned later that her husband is an LO.

    The YSP is definitely a “hot spot” that doesn’t have to be the problem that it is.

  20. YSP is a tool to lower costs and compensate a broker. Correspondent lenders take on credit risk, interest rate risk and short-term performance risk. I have no problem with a correspondent or bank not discosing their SRP.

    However, a good originator doesn’t hide from his/her compensation. If you outline it for a borrower upfront (I’m going to make 1% plus a $500 processing fee…no matter what), and explain how we can be compensated, everybody wins. Consumers really only care about the terms, the YSP is not really an issue unless it’s deemed excessive or appears to be “slipped in”. When disclosed as a tool to reduce closing costs, it’s an originator’s best friend.

    The same goes for prepayment penalties (PPP) If you demonstrate that it is a way to lower costs or rate, and disclose it as such, you are inspiring confidence in the consumer in your ability ot get them a fair deal.

    It is highly unlikely that a consumer is going to get the absolute lowest rate and fees.

    It’s the originators that sell that lie that should be answering to a higher authority. Consumers just want to be treated fairly.

  21. Letters of explanation?

    Face it, gang. You’ve got to “outline” them for the borrower. I’ve seen some written by the borrower that tell FAR too much information. The borrower thinks they have to reveal all of their sins in the mortgage confessional.

    I tend to have a customer email me an explanation so I can extract the salient points for the underwriter. Then I e-mail back the relevant points, have them handwrite it, and fax it to me. A LOE that exceeds 100 words is ineffective.

  22. Jonathan,

    There is no comparison between a banker and a broker. Just because banks don’t have to disclose their yields doesn’t mean that brokers shouldn’t have to either. It’s a false comparison meant to spark passion from the broker community only.

    If brokers don’t want to disclose their yields, then they can become a bank. Banks are SO DIFFERENT from brokers when it comes to training, background checks, supervision, and money spent on COMPLIANCE like not allowing a bank employee to write that letter for the consumer.

    But the underlying reason is because the banking lobbyists have way more political power than the mortgage broker lobby. Unless the mortgage brokers in DC can get enough money together to influence a change in RESPA-related disclosures, stop whining and start complying with state and federal law.


    If a mortgage broker’s costs are significantly higher than what showed up on the good faith estimate at application time, the mortgage broker is required to REDISCLOSE everything 3 business days PRIOR TO THE CONSUMER GETTING INTO THE SIGNING ROOM. New GFE, new Truth-in-Lending docs, etc. There are a couple of exceptions to this rule: Unless the total amount of the closing costs is the same total amount quoted on the original GFE.


    [Jonathan, a question like this will more than likely be on your loan originator exam.]

    Tim, I recommend asking the mortgage broker to pay your escrow fee since it sounds like the mortgage broker might have been out of compliance with our state’s Mortgage Broker Practices Act.

    When a loan is not made, the mortgage broker is still required to pay all third party providers.

    Mortgage brokers, some of you do good work out there. It’ time to clean up your own industry so that the entire reputation of the mortgage broker community doesn’t go any lower than it already is. If there’s just too much money to be made, then be happy with your pile of money and know that what comes with it are harsher state and federal laws, and a low reputation with all consumers. It will be harder to develop trust with your clients and anyone in the industry. New state licensing laws for mortgage brokers are only one small step down a very long path uphill. I’m ready to go up that hill and help mortgage brokers and loan originators learn their state and federal laws and learn how to be ethical. Who’s with me?

  23. Jillayne-

    I never suggested that brokers should be treated the same as bankers.Another “comment” had talked about using YSP when comparison shopping — I was just pointing out that it can’t be done when comparing a bank vs. broker offer — and that it wouldn’t even be helpful.

    I did comment that, “I don’t mind having to disclose YSP even though banks don’t”. By that, I meant that I don’t find myself at a disadvantage having to discuss my compensation with the client even though a bank loan officer does not. If anything, it helps the client understand the process and helps build our relationship.

    And what’s with the “[Jonathan, a question like this will more than likely be on your loan originator exam.]”? Are you implying I’m unfamiliar with what’s required of me — or am I missing something?


  24. Jillayne,
    “Banks are SO DIFFERENT from brokers when it comes to training, background checks, supervision, and money spent on COMPLIANCE like not allowing a bank employee to write that letter for the consumer.”
    Banks are different than brokers. Again, it comes down to the individual, not the institution. A banker who is not licensed (since they do not have to be) has nothing to lose.
    LOs who work for banks (like WaMu, Countrywide, Wells, etc) DO write LOEs for their borrowers. Google “WaMu mortgage fraud”…

    Bank LOs are not any more or less ethical than brokers.

    This is why any individual who originates a residential mortgage loan, regardless of what type of mortgage company (bank, broker, correspondent, thrift, credit union, etc) should have to be licensed and upheld to the same law.

  25. Hi Jonathan,

    I was referring to Tim’s comments to you in post number 12. I am delighted to hear that you’re familiar with all state and federal laws governing lending that will be on the originator exam.

    (link opens a 2 page pdf for anyone else who wants to take a look)

    It will be the quiet leaders such as yourself, who work diligently to help the consumer day after day, that will slowly, incrementaly, influence change in the industry.

    The vast majority of all loan originators who come through our classes are unfamiliar with the 3 day re-disclosure requirement. It sounds like you’re already doing this. I apologize: I did not mean to imply that you Jonathan were not familiar with this requirement and if my words came across that way, that was unfair to you. Thanks for pointing that out. You taught me something today.

  26. Hi Rhonda,

    You intrigued me, so I googled wamu mortgage fraud. What I found was a couple of whackos ranting about wamu and using that keyword to rank higher in the search engines, and really trying to sell the reader a “mortgage elimination” scam.

    So I went over to Rachel Dollar’s mortgage fraud blog and searched for WaMu there. I did find several posts, but upon reading them, it appears that it was the mortgage broker who de-frauded wamu, or it was a consumer who de-frauded wamu.

    I love debating you, Rhonda! It’s fun 🙂 so try again, show me banks or credit unions who are committing predatory lending. The last big bank targeted by ACORN was WellsFargo who admited no wrong-doing but quietly changed some of their lending practices.


    Have you had any problems with banks and predatory lending?

  27. Jillayne-

    I just had a client come back to me from Washington Mutual (He left me to work with Wamu since they quoted terms I couldn’t come anywhere close to). He closed on a loan thru their retail channel – not thru a broker.

    At the closing table, he was surprised to see that there was a $15,000 fee listed on the HUD. This was supposed to be a no cost refinance. He immediately called the loan officer he worked with, who said something to the effect of, “oops. Yeah, ummm, we made a mistake when quoting you rates. If you want it to be a loan with no fees, we’ll need to increase the interest rate by .75%. I didn’t think it made a difference”.

    He decided to take the .75% higher in rate (since it was still less than he was paying), drop all the fees/costs, and then come back to me.

    There was no “re-disclosure” of the $15,000 in fees. I’m not sure if this LO was incompetent or unethical – or both.

    You won’t find this on a web site nor can I “prove” this happened to you thru this forum.

    This could have just as easily happened with a broker.

    Similarly, there are a few local banks near me, that in the past, had included in their LO recruiting ads that they didn’t have to pass the State LO exam in order originate loans with them. I personally know of several LO’s unable to pass our very simple and basic state exam who then went to work for Banks. Boy do I feel bad for the consumer who trusts them just because they’re at a bank…

    Rhonda isn’t arguing a broker is better than a banker or vice versa — just that all should be held to the same standards (If I’m reading her comments correctly). I agree completely.


  28. Ed-

    I know you asked this of Rhonda and I’m certainly not a legal expert so I’m just offering my opinion, however, I don’t see how it’s any different than an LO taking a loan application over the phone and having the borrower sign it at a later time. As long as the information is provided by the borrower and is truthful – I don’t see how it would be wrong to do.

    If the LO isn’t getting the information from the borrower and is simply writing whatever they think needs to be written to satisfy an underwriter and then convinces a borrower to sign it — then that, of course, would be wrong.


  29. Hi Rhonda,

    Sure. I chose to help create Ethical Lending Foundation after our state changed the laws requiring education providers be overseen by “professional organizations” instead of by the state. On state record, I testified at a public meeting against this change on the grounds that it is not fair to independent education providers and would create a monopoly by one current dominant trade group. So with the new law, the best route for consumers and mortgage lenders is to have many choices for education. We are just one choice.

    There is a small but growing group of people here in the northwest who are looking for something more than what is currently being offered by the existing trade groups.

    Here is one example:

    NAMB Code of Ethics:
    NAMB members shall conduct business in a manner reflecting honesty, honor and integrity.

    {all you have to do if you’re a member of NAMB is to look like you’re being honest. You don’t actually have to BE honest. This is not helpful for NAMB members or consumers. The Mortgage Women’s code of ethics has similar wording.}

    Ethical Lending Code of Ethics
    Article 3
    Lending Professionals have an absolute duty to be honest and truthful in their representations to the public. This includes all modes of advertising including TV, radio, print, Internet, flyers, email and the like. This duty requires that all assertions are true in fact. It also requires that sufficient information be provided to the degree required for a reasonably prudent person to make a rational decision with regard to a loan program. Incentives must be set out in clear, unambiguous, comprehensive and clear language.

    Article 10
    Complete honesty is required at all times. Misrepresentation of relevant facts is never allowed….Lending professionals shall not exaggerate, misrepresent, or conceal facts that are relevant to a particular client or that are relevant to what any rational client would want to know in that transaction.

    There are people in the industry who are already conducting business in a manner that comports with all the things Ethical Lending Foundation requires of its members. I meet them every day. These folks tell me that they are sad to see the reputation of all lending professionals go down due to the acts of a small minority of individuals and companies.

    Then there are professionals like Tim who would like to have had a different outcome in the closing room.

  30. I’ve seen plenty of cases where a mortgage broker was more intent on making their fee than providing the best alternative for the buyer. I’m pleased to know that licensing is becoming a requirement for all mortgage professionals rather than the poor situation we had in the past where only a single individual out of 30 within an office had to meet that requirement.

    Improvements can be made in lending and real estate fields if we require the people in the industry to be higher level professionals. On top of that it would be good if there were more trainings geared toward customer service, ethics, and building long term client relationships versus the sales only focus. Many people I know that got into one or the other of these fields did so strictly with the sales element in mind. It’s a pleasure to see a push toward higher standards.

  31. Jonathan
    Thanks for the insight. I tend to agree with you.

    How do you feel about YSP’s after todays discussion?

    I have to admit that Rhonda’s and Brian’s input have given me a reason to pause and reconsider my position a bit? I think we all agree on the need for proper disclosure.

  32. Hi Jonathan,

    Do you work in Washington State?

    [I personally know of several LO’s unable to pass our very simple and basic state exam who then went to work for Banks]

    WA state hasn’t yet released their test or begun testing yet.

    I don’t know the loan amount in your example, but it looks like if the loan amount might have been high, like $500K then $15K would be 3% in fees. RESPA says that the WAMU customer should receive a new good faith estimate prior to signing if the original GFE was for a no-fee loan.

  33. Ed,

    Yield Spread Premiums for mortgage brokers are fine as long as they are fully explained to the consumer and disclosed at the time of application on the Good Faith Estimate. If there’s a large change in the YSP between application and closing that benefits the loan originator, redisclose with a new GFE and TIL docs before the client enters Tim’s closing room.

  34. Hi Jonathan,

    Sure. In WA state, a large change to our state regulator means “if a reasonably prudent person would want to reconsider the loan.”
    This gives our state regulators broad authority. But the state also gives mortgage brokers and originators a little gift. If the total cost of fees is not higher than the cost of fees disclosed on the original GFE, then the broker does not have to redisclose.


  35. Hi Ed,

    After reading your blog, I take you to be one of the good guys and it sounds like you got slammed unfairly in that title insurance company meeting. (Post #22) What do you think about strong YSP explanation in Tim’s original post?

    It sounds like that was the first time the client saw it. If it was given to the client ahead of time, in an educational way (like it sounds like Jonathan does) then there would be fewer fireworks at closing.

    As a former escrow company owner, would you want to create a business practice rule that all originators who send you escrows, provide proof of YSP disclosure at application, OR the mortgage broker can choose to pay your escrow fee in advance?

  36. Jonathan

    I’m visiting Illinois for the first time time this July. I’ve been invited as the featured speaker at the centenial celebration for your state’s land title association. I’m really excited about spending several days in Springfield and getting to know the place and the people.

    I hope that all real estate professionals in Illinois are as concerned and tuned in as you!

  37. I’m obviously unfamiliar with Washing Sate Law/Regulations….

    Are they referring to YSP or are they referring to the costs/fees associated with the transaction? I only quickly scanned the page you provided a link for, however, I didn’t see any mention of yield spread premium.

  38. Ed,

    I appreciate that. I hope you enjoy our stay with us!

    I think the fact that we’re all having these conversations is a strong indication that there are some good people in our business (Realtors, educators, LO’s, Title/Escrow Officers, etc).

    Even if we don’t always agree all the time! 😉


  39. Jillayne

    In retrospect, numerous people commented that I was slammed unfairly in Norfolk. I only mentioned the YSP before eliciting an emotional response and was unable to deal with the issue effectively. I’m still friendly with this person and spent several days with her,and others, last fall at FATCO’s corporate campus in Santa Ana. I was asked by management to present a fraud prevention strategy to national claims council.

    I wouldn’t require proof of prior notice if I were still in business. I, however, see nothing wrong with a title company disclosure that explains the YSP to borrowers and discloses that actual amount in that specific case. I’ve never been comfortable with the way YSP’s are traditionally shown on the HUD 1.

  40. Jonathan,

    All costs and fees, including the YSP.

    But disclosing YSP on the GFE isn’t only a WA state law, mortgage brokers are required to disclose their yield spread premium (YSP) on the good faith estimate (GFE) by HUD under the provisions of RESPA.

    If anyone wants to read the fed law on this just google “HUD statement of policy 2001-1”

    Our state requires an actual amount and not a YSP “range” like 0 to 3 percent possible YSP. Our state concluded that estimating a YSP range is deceptive.

    If anyone needs the reference on that, it is in the WA state audit manual for mortgage brokers. http://www.dfi.wa.gov/cs/pdf/mb_exam/mb_exam_draft.pdf

    do a PDF keyword search on “YSP” and all the guidelines are there to read.

  41. Loan officers-

    In Washington, do you have to disclose the YSP’s or potential YSP on the GFE? As I mentioned before, I don’t know that you can until you have placed your client with a lender and loan program and lock your interest rate. Out of curiosity, just looking at a couple loan doc sets this morning, there is no mention of yield spreads or their impact on the GFE. My understanding is that there is some booklet provided by HUD that explains loan costs etc…but I don’t know if it addresses YSP, nor if anyone really takes the time to read it.

    I do know that Washington State Dept. of Financial Institutions has a consumer CD that is cool and explains loans, including YSP definitions.

  42. You just answered my question Jillayne. Thanks! Golly, I wonder if Brokers are unaware of it, because the two loan doc sets I looked at this morning with GFE’s don’t seem to have yield spreads disclosed.

    I’m really learning a bunch with all the feedback on this issue.

  43. Jillayne/Tim,

    I understand federal law (or at least I think I do…). 😉

    We ARE required to disclose YSP’s on our GFE, however, I believe ranges, however deceptive, are still accepted (at least in IL). If we’re not locking at the time of application — we will include a range. Once a lender is selected (helps us firm up fees/costs) and rate is locked, we update the original GFE and re-disclose to the client.


  44. Tim,

    I’m going to answer the question again since Rhonda has helped us by pointing out to RCG readers the differences between institution type:

    a LOAN OFFICER who works for a bank or credit union does not have to disclose a YSP because banks earn their YSP after the close of escrow. A YSP that happens after escrow does not need to be disclosed. This is stipulated in RESPA.

    a LOAN ORIGINATOR who works for a mortgage broker must disclose their YSP on the GFE. This is stipulated in RESPA.

    Don’t like the laws? Then we would have to change RESPA, a federal law that was written in 1974, before the huge influx of brokers into the community.

    Tim, I would be interested in hearing if you were able to collect your escrow fee on the cancelled transaction.

  45. Jonathan,

    Good work! It takes years to master state and federal laws. The best practitioners can do is to commit to spending time learning them. It’s part of any loan professional’s career (processor, originator, underwriter, closer, title rep, Realtor/RE Agent, and so forth): learn the basics at the beginning of your career and then add to your knowledge over time.

  46. Ardell,

    Sorry I missed your question about Credit Scores. It varies…some lenders have credit bureau information as part of the loan package and sometimes borrowers just offer the information themselves in conversation about the loan. In escrow, we are fact driven and don’t go down the path of whether someone should or should not be doing something or offering any legal advice. By the time they are at escrow most of those questions are already answered.


    Industry tradition says we would struggle to get our fee. “Hopefully, the borrower will come back to us when they have another loan,” says Lynlee.

  47. Tim,

    Theory is that for the most part, Title and Escrow are chosen by agent, and so based on volume of business, the few that don’t make it to the end are forgiven. If we would get to a point where individuals select Title and Escrow as the norm, then I could see a basis for getting paid either way. But if an agent is throwing you 20 closings and one doesn’t close and 19 do close, doesn’t seem right to charge for the one that didn’t. The only people who get paid if something doesn’t close are the home inspector and the appraiser. Some agents don’t like to open escrow until after the inspection for that reason, but I don’t think that is an option.

    Very rarely does a client come in with a choice of Title and Escrow. If they do, then they are usually in the business.

  48. “bank or credit union does not have to disclose a YSP because banks earn their YSP after the close of escrow.”

    Banks do not earn YSP. They either service a loan and receive interest or sell it and earn a servicing release premium (SRP). Banks and mortgage bakers choose to pay originators differently than brokers.

    A mortgage broker must disclsoe YSP within 3 days of application (a range is not deceitful) A broker is also required to disclose upon forward locking a rate and that disclosure must be accurate. (then, a range would be deceitful)

  49. I’m back from shopping for carpets for my son’s room which flooded earlier this month… Jonathan and Brian, I’m glad to be associated with both of you as the lenders in this post!

    Jillayne, I enjoy debating with you too! You did a pretty good job on comment 53. I’m assuming your putting correspondent lenders in the bank category? This is where it could get challenging for Tim, or other escrow officers to determine if there is YSP being paid. As a correspondent lender, sometimes I broker and sometimes (most times) not. I’m not sure it would escrow job to know whether or not there is YSP?

  50. Reba, Licensing is not required for all mortgage professionals, only mortgage brokers. Bankers (WaMu, Countrywide, Wells Fargo, etc.), Credit Unions and Thrifts are excluded. I’m glad for the licensing as well…just received mine on Friday. However, I do wish it included everyone who originates a long.

    I’m sounding like a broken record! 😉

    Jillayne, you deserve a lot of credit for http://www.ethicalending.org.

  51. Brian,

    Thank you for the better detailed explanation of the behind-the-scenes view of what a bank can do after closing.

    In WA state, disclosing a YSP range is considered deceptive by our state regulator. The link is up there in post number 49 if anyone needs the reference.

    I wrote a post about our (former) state regulator Chuck Cross who’s headed to the other Washington.


    One of the projects Chuck will be working on is national licensing/testing/education for mortgage loan originators and brokers which might make compliance easier for brokers who do business in multiple states.

  52. Thanks, Rhonda!

    The real credit goes to the lenders out there who tirelessly continue to put the consumers interests above their own, and who need no law or code of ethics for motivation to do so. 🙂

  53. Rhonda,

    Well, maybe a natural disaster will occur whereas all the lobbying money in the coifers of the banking industry will get blown away by a powerful Seattle windstorm and the red sea will part and the money will magically appear in the bank accounts of the broker lobbyists.

    But now our dialogue has dissolved into one of politics. We live in a capitalist democracy, so I’ll offer the the perspective of how the free market might help:

    I say the best way to make that happen, Rhonda, is for the mortgage broker industry to become so well-respected that all its competitors will be forced to raise their standards just to compete. Somebody has to be the leader in raising standards.

    And we still haven’t figured out a good way for escrow companies like Tim’s to collect their escrow fee when a transaction cancels.

    Does anyone have more ideas for Tim?

  54. Jillayne, you can drink my iced latte anytime! 😉

    I would suggest to Tim to make it his company policy that there is a cancellation fee. He could post it on his rate sheets and he would need to collect upfront. Let’s face it, Tim can try this but it will not be supported by the industry, meaning those who determine where the escrow will be. This might be more successful in a refi environment…but with a purchase…who pay the cancellation? The person who directed the escrow (the agent who won on the psa)? It wasn’t the seller or buyer’s choice.

    Bottom line, with the lender scenario, when I was mananging an title/escrow branch, I would have the honor of letting some LOs know their business was not welcome. A LO who had a 3 year prepay with clients with excellent credit with a history of deals such as this, would have been someone I would have a meeting with. It wasn’t fun but could be satisfying.

    Tim, if you are noticing a pattern of transactions from a specific LO where their transactions are not closing or their clients are not happy, maybe you should meet with that LO to discuss this directly?

    As a LO, when I have a real estate agent who constantly sends me people only to shop (they seem to have the same script), I’ve priortized my business towards my clients who are bona fide. And I’ve met with the agents to let them know how I care for my practice.

  55. What does the LO have to gain by having a 3 year pre-payment penalty if one is not called for by the buyer’s qualifications? Why would one LO be using 3 year prepayment penalties more than another?

  56. Money in the LOs pocket, Ardell.

    It needs to be disclosed from the beginning and the borrower needs to know their options. I am always against a prepay if it can be avoided.

    The borrower needs to know “You can have this rate at x% with a 2 year prepay or a rate at y% with no prepay. Here are the cost difference, payment difference, etc.”

    Life happens, so I always do my best to talk a buyer out of one. But, if I’m in such this discussion, it is because the lender I’m brokering to prices their loans with one and IF they even offer a buyout, it’s expensive (either upfront cost or in rate).

    I never tack on a prepay for my pocket. But…some slimy lenders do…it’s big money.

  57. I told you transparency would give you a headache. Let’s go back to 20% down and 5/25, 7/23 or 30 year loans conventional and FHA/VA for everything else.

    And people think I am overstepping my bounds and being a noosey-body for insisting on seeing the GFE and knowing the rate and terms. Agents…it IS your business to KNOW your buyer is getting a fair shake from the lender. The day agents just started handing buyers over to the lender, and not knowing anything about the lending industry, was a very sad day indeed.

  58. “In WA state, disclosing a YSP range is considered deceptive by our state regulator”

    That seems highly impractible. When a loan application is taken, and the rate isn’t locked it is IMPOSSIBLE to be precise in YSP disclosure. Is the intent to focus on the word “estimate”? I watched a loan that the customer didn’t want to forward lock lose $2500 in YSP this within a 2 week period this past month; it cost her that much more in closing costs.

  59. Rhonda, your statement,

    “Comparing lender closing costs to rate is the only way to shop rates when all the various lending sources disclose differently. This is one reason a consumer should never shop by APR.”

    makes no sense to me. APR is exactly how you can compare the combination of rates and closing costs disclosed from different lending sources. If the loan terms are otherwise the same (fixed/ARM, length,, pre-payment, etc..), the loan provider that can deliver the lowest APR is the one providing the best deal. It doesn’t matter if it’s a broker, banker, lender or Tony Soprano. APR tells the borrower who is the cheapest.

    All of the talk about YSP mistakenly focuses on how much money the LO might be making instead of how much they are paying. This is a mistake because the LO willing to make the least on a deal is often unable to provide the lowest price anyway.

  60. Todd,
    Here lies the problem with shopping by APR. Banks, credit unions, thrifts, brokers and correspondent lenders have different requirements for what is to be considered closing costs to be factored into the APR. For example, a thrift (HFC, Beneficial, etc). does not calculate the origination/discount fees. So they could be charging 5 points and have a better APR than I would as a correspondent lender charging 1 point discount fee.

    APR was intended to be a shopping tool. However it is seriously flawed. That’s why the consumer really needs to compare closing cost with rates line by line by good faith estimates that they receive at the same time (since rates may change during the day) from whomever they’re shopping.

  61. Rhonda, are you saying that a Thrift can charge 5 points to the borrower ($5,000 on a $100,000 loan) collected from the consumer at closing, and not have to calculate this charge into the APR? Just to be clear, you’re not talking about YSP, or SRP, but an actual fee collected directly from the borrower?

  62. Yes, we’re clear. APR is what I’m discussing. And different types of lenders factor in different closing costs. I would say it’s confusing for consumers, although most probably don’t know about this.

  63. Wow, I’ve never seen that before. S&L/Thrifts have zero footprint here in Denver so maybe that’s why. It’s hard for me to beleive there would be any legal reason why theye’d be able to do that. I think I’m going to look into this further.

  64. Please do and let me know what you find out. I discovered this by one of my clients several years ago. They were elderly and had a horrible mortgage with Benefical. They brought EVERY piece of paper ever related to their mortgages to our consultation. I was reviewing their previous mortgage to see when their prepay was up. When I saw the closing costs on the HUD, I was sickened. This lender ate $10k of their equity in just the origination/discount alone. I was expecting to see a huge difference between the rate and the APR…very little. I presented this information to the president of our company hoping my clients might have something they could possible go after Beneficial with and that when she informed me that thrifts (such as Beneficial and HFC) do not factor origination/discount points into the APR.

    It is hard to believe this would be allowed. But look at the different licensing requirements for loan originators and bankers. There are different rules for different types of lenders throughout our industry.

    I always thinks not a safe way to shop because you could go to three different loan originators working for the same type of lender and still receive three different APRs. That’s why I always come back to shopping by rate and closing costs.

  65. Todd, I just got off the phone with the president of our company and she is not recalling this scenario. For me it was like yesterday as I was so upset by it. I might not be correct regarding the points not being factored into the APR for thrifts. I’m going to do more research on this, too. My apologies. 🙁

  66. Rhonda,

    Regardless. I’m with you. Getting a full list of the total costs of the loan is imperative when comparing loans, and not simply rate or APR. Problem is, brokers say “Oh, I don’t know until we place the loan”. On East Coast I always used direct lenders for this reason.

    Hate to bring this up here, but really, why all the middlemen on the West Coast? I spoke with a direct lender (Wells Fargo, I think) and they said it isn’t any cheaper to go direct, as opposed to going through a broker. Can’t figure out why that is. Except for Credit Unions, which appear to have some very good direct deals from time to time, but they seem to be short term, limited funds, programs.

  67. I’m a different animal, being correspondent, than a broker. We are processing, underwriting, drawing docs and funding in our own line of credit. Our loans are sold after closing. We can broker and do, for subprime, but I prefer not to as we “lose control” over the process.
    As a correspondent lender, we are often provided more competitve pricing than going direct. I have often been able to better a rate, for example, than going direct to a Wells or WaMu, when that’s when that may be the source I’m using to quote the rate from.
    We just have so many options.
    As far as the geographics, could this be more of a timing issue? (I don’t know when you were on the East Coast).

    I stand by not shopping by APR because if you compared two APRs from two different LOs with the same rate and costs, you could very well wind up with two differnt figures.

    And, I think just shopping rates to find out who will be helping someone select a mortgage is not the way to go. There’s more to it than rate.

  68. Hi All,

    I agree with Rhonda that only focusing on APR will not always lead a consumer to good end results.

    Let’s face it: mortgage lending is complex for those of us IN the business. Imagine what it must be like for consumers. Most consumers like to try and look for an EASY answer. This is how folks are taken advantage of because they’re only looking at one part of a moving machine with many parts. An informed consumer looks at the big picture:

    product type
    originating lending institution
    the institution to which your loan will be sold
    escrow, title, and all ancillary services needed to obtain the loan and the costs involved with these related services
    and all the people who are working these machine parts.

    Ooooo…suddenly I feel like “organizational man”….a cog in a wheel. Creepy. 🙂

    I have a longer reply which fully explains APR that I will post separately.

  69. Might I share this with you? I use it with all of my clients. I’ve worked with 617 families in the past 13 years and I tell all of them this:

    1- Establish a program.
    2- Get a rate with no lender costs (processing, underwriting, junk). Appraisal and credit are okay.
    3- Add one point…what’s the rate? (how many mos to b/e?)
    4- Add two points…what’s the rate? (how many mos to b/e?)

    It really is that simple.

  70. Pingback: This Just In: Zero Interest Loans, at a Cost of Zero, with a Monthly Payment of Zero (APR 0%)* | Rain City Guide | A Seattle Real Estate Blog...

  71. Whoa, sorry I missed this discussion in January.

    Tim: The question most close to my heart is whether or not the title agent or escrow agent is due payment for services rendered in the event of a cancellation and I say YES. I don’t believe you can charge for title insurance because the policy has not been issued, however, you have provided full services of title abstract, lien letters, document preparation, etc. I would invoice the consumer. They may in turn wish to contact the mortgage broker for reimbursement if he mislead them.

    As to the credit letter, as a former mortgage underwriter, I would frown on the practice of a loan officer writing the credit letter. I am aware of no prohibition on the practice but it defeats the purpose of the letter. In the case you cite, however, I think the mortgage underwriter didn’t really care about the letter anyway. Waiting to review a credit letter post closing is ridiculous. The underwriter in this case seems to have only been interested in having a letter in the file and not at all interested in the underlying credit risk.

    I think you should send a copy of that YSP disclosure to HUD and the committees in the House and Senate considering predatory lending.

    As for APRs, the federal guidelines for calculation do not change from institution to institution. The guidelines, when followed, produce a terrific consumer tool for shopping. The APR as it was intended to be used cuts through all the BS and gives consumers a real base line comparison. If we have lenders doing crappy calculations then it’s all part and parcel of the entire degradation into crap of the entire industry.

    Ed has said Old is the “new” new. I believe that and wish we could start a new school and teach a new generation how old fogies used to do things. “Back in the day” we used to read calculation guidelines and figure them out for ourselves because we had to. We didn’t have software companies doing the thinking for us.

    “Back in the day” we competed on rate and service and thereby gave the consumers the best deals possible. Predatory pricing guidelines and disclosures telling the buyer the mortgage broker is a thief weren’t necessary because competition took care of all that.

    Why did competition change? How did we lose our focus? I think controlled business and affiliations started the entire industry on a steep dirty slope away from good service and healthy competition.

    So there’s my two cents. Better late than never.

    Great post, Tim.

  72. Pingback: What the Space Shuttle Challenger Disaster Can Teach Us About the Current Mortgage Lending Crisis : National Association of Mortgage Fiduciaries

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