Yield Spread Premium

How Yield Spread Premiums Work

Every loan has a par rate, the base interest rate at which the lender will fund the loan without paying or charging additional points. When a broker originates a loan above par, the lender pays the broker the difference as a yield spread premium. For example, if the par rate is 6.5% and the broker delivers the loan at 6.75%, the lender may pay the broker 0.5% to 1.0% of the loan amount as YSP . This premium compensates the broker while allowing the borrower to close with reduced upfront costs.

Regulatory History and Current Status

YSPs became controversial because they created an incentive for brokers to steer borrowers into higher-rate loans. The Dodd-Frank Act of 2010 and subsequent CFPB rules fundamentally changed how broker compensation works:

• Loan originator compensation can no longer vary based on loan terms or conditions (including interest rate)
• Brokers must choose either borrower-paid or lender-paid compensation, but not both on the same transaction
• The term "yield spread premium" has largely been replaced by "lender-paid compensation" or "lender credit" in modern disclosures

While the mechanics remain similar (a higher rate generates lender credit that offsets closing costs), the regulatory framework now requires consistent, disclosed compensation structures.

Impact on Borrower Costs

Lender-paid compensation reduces the borrower's cash needed at closing but increases the total interest paid over the loan term. Borrowers comparing loan offers should evaluate the combination of rate, points, lender credits, and total closing costs rather than any single component. The Loan Estimate form facilitates this comparison by itemizing origination charges and lender credits separately.