Definition
A yield spread premium is a kickback provided to a mortgage broker or finance manager from a lender as a rebate, representing a form of commission that is based on an applicant agreeing to a higher interest rate than they actually qualify for.
Analysis
A yield spread premium is often legal, and mortgage brokers are required to disclose this to the borrower at the time of closing. This may be disclosed as a POC fee, which means paid outside closing. Although some legislation may limit yield spread premiums from certain subprime mortgages, it is commonly practiced in other lending environments—especially car loans.
Borrowers that see this fee should understand that they are being coerced into paying a higher rate than what they could likely receive from another lender. Mortgage brokers will frequently steer them into higher interest loans in order to receive this kickback. The kickback itself could represent a couple thousand dollars or more, which may be several times the rate of their normal commission for the sale.
Finance managers for automobile dealerships and car sales lots also frequently attempt to steer applicants into higher interest loans in order to receive a kickback. You may avoid this practice by arranging your own financing. Credit unions frequently offer the lowest rate because they do not pay kickbacks.
Whether shopping for a car loan or a home mortgage, you can avoid paying higher costs by shopping around for the best rate. Changes to FICO scoring models allow for you to shop around without being penalized for additional inquiries. All home mortgage inquiries or vehicle loan inquiries may be grouped together and collectively count as only one hard inquiry if they occur within a short period of time.
For lenders that subscribe to classic FICO score products, you have 14 days to shop around without additional penalty. The NextGen scoring products allow up to 45 days.
