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Comparing HR 3915 AND S 2452: Yield Spread Premium

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Ruth Lee

Yield Spread Premium:

YSP: Section 123: Prohibition on Steering Incentives: Amount of Originator Compensation Cannot Vary Based on Terms: No mortgage originator may receive from any person, and no person may pay to any mortgage originator, directly or indirectly, any incentive compensation, including yield spread premium or any equivalent compensation or gain, that is based on, or varies with, the terms (other than the amount of principal) of any loan that is not a qualified mortgage.

In the last sections of Title One, HR 3915 the Act doesn’t proscribe all YSP, it specifically allows Yield Spread Premiums only on “Qualified mortgages ”as defined in Title Two of the Act. While it doesn’t specifically refer to SRP, the language “equivalent compensation” is blurry at best and will ideally be clarified before passage. The “Qualified and Qualified Safe Harbor” highlights include: all FHA and VA loans, ability to repay, net tangible benefit, and a reduction in APR calculations. These definitions are explored under HR 3915: Changing the Framework of TILA. These definitions are important as they relate to YSP, but much more so as they relate to rebuttal presumption and creditor/assignee/securitizer liability, which will be explored later.

Because only Qualified Mortgages are eligible for YSP, it is interesting to note that the Federal Banking Agencies are authorized to “jointly prescribe regulations that revise, add to, or subtract from the criteria that define a qualified mortgage and a qualified safe harbor mortgage, to the extent necessary and appropriate to effectuate the purposes of this subsection, to prevent circumvention or evasion of this subsection…” What is unclear here is whether “they” will be able to amend the percent above index for APR compliance.

S 2452 takes a very different approach. It just lumps almost everything into APR points and fees. It would amend TILA to define loans as prime, non-traditional and subprime loans. The APR percentages of 3% and 5% and the yield indexes (yield on comparable treasuries and Conventional mortgage rate spread) that used are the same as HR 3915, but in S 2452 they are only used as a means to qualify mortgages as subprime and are subject to that set of restrictions and liability concerns.

S 2452 then continues with a re-definition of High Cost Mortgage – which is 8% on first lien…much the same as now, right? In closer examination, the real issues begin to reveal themselves when examining the change to the definitions of points and fees. These definitions will now include:

  1. all standard points and fees PLUS YSP
  2. premiums for credit life
  3. maximum prepayment penalties charged or collected under the terms of the loan, and
  4. all prepayment penalties incurred by the customer when the loan refinances through the same company as the original transaction.

After adding in all those fees, any loan that qualifies as Section 32 is ineligible for YSP and cannot have a provision to accelerate (exclusive of default). Additionally, S 2452 seems to indicate that all of these fees AND standard points must be paid in cash….they CANNOT be financed directly or indirectly into the loan. To sum it up, Section 32 loans would be almost impossible to execute which I believe is their end goal.


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