How YSPs Work

• According to the website The Mortgage Insider, YSPs are "extra profit slipped into virtually every loan," and are "calculated as a percentage of your loan amount." For example, a mortgage broker may inform you that you locked your interest rate in at 5.5 percent; however, if that rate includes a yield spread premium, the actual rate is 5 percent. The broker takes the difference -- 0.5 percent, or the yield spread premium -- and pockets it as an additional fee.
  
  

Riskier Loans Equal Higher YSPs

• BusinessWeek noted that higher interest rate loans -- riskier loans -- often earned more YSP dollars for the broker. Although it's possible that the broker could use the YSP to assist the borrower with closing costs, usually the broker keeps the cash. Since higher-rate loans equal higher YSPs for brokers, there is little incentive for a broker to act in the best interest of his client; this results in a significant conflict of interest, which is why the Federal Reserve acted in 2010.
  
  

Finance Charges

• Since lenders must provide a truth-in-lending statement that shows the "true" interest rate that the borrower is paying, the yield spread premium is included as part of the annual percentage rate calculation. The payment schedule that's part of every lender mortgage package includes the APR and the loan amount; by default, both parts of the finance charge are included, the interest rate and the yield spread premium.
  
  

YSPs and Closing Costs

• Despite these concerns, according to HUD, "YSPs are not 'illegal kickbacks,'" according to Realty Times. Many mortgage professionals insist that although some "unscrupulous" brokers may "price gouge," they use the fee to offset other potential closing costs. For example, a "no fee, no point" mortgage can only be provided if the borrower pays a higher APR that includes a YSP. Although the borrower will pay more in interest over the life of the loan, he will not be forced into paying thousands in closing costs at closing. However, regardless of how one views YSPs, they are considered part of a mortgage's finance charges.