Compensation of Loan Officers, Yield Spread Premium (YSP) Vs. Service Release Premium (SRP)

As of late the trust for the banking and Real Estate industries has come under attack. The market is anemic at best and often the finger points at the professions that are in the field under fire. The mortgage business in particular is going through a tremendous overhaul as it relates to education and disclosure requirements. Did you know that the broker has a much stringent and EXPENSIVE requirement than the banker to just stay in business? Did you know that the Loan Originators for depository banks such as wells Fargo and Bank of America are exempt from background checks and industry National Mortgage Licensing education and exams? This has made many small business owners, of mortgage brokerage companies in particular, to rethink their business model solely based on the issue of disclosure of compensation.

For the record, my business is based primarily on relationships instead of transactions. What that means to me is that I rather provide high quality service at a low cost to ensure the repeat business instead of investing in mailers and expensive TV ads. I have been in transactional model and I personally do not like it.

Lat week I touched bases with a client that had used my services to purchase his home in beautiful San Diego. As the 6 month seasoning of his FHA mortgage approached apparently it triggered the system of many mass mail mortgage companies and he received several offers. I don’t mind competition and having dealt with this savvy individual before I feel obligated to offer him a deal that nobody else can.

As it turned out I was competing with a “direct lender” that had the guts to say that he did not get compensated on commissions but just on base salary and bonuses. I called the company on Friday pretending that I was seeking employment to verify their model and as it turns out it was a lie. Furthermore, my competition went on to confuse the client by making a statement about how brokers receive YSP (Yield Spread Premium) and “banks” do not make any money for the rate they charge, SRP (Service Release Premium). Although “direct lenders” make plenty of money by charging higher rates, the government has given them a safe harbor by allowing them not to disclose their compensation in the already confusing new 2010 Good Faith Estimate (GFE). When comparing the estimates of the two models, the broker is at an obvious disadvantage because it would appear at face value that he/she is making more money than the direct lender. This is simply not true.

I find it very sad that due to the corresponding lenders big pockets and their continued financial support and lobbying to government individuals through the American Bankers Association, such as Christopher Dodd and Barney Frank, banks are not required to disclose how much money they make but the brokers do. Loan originators have been making the choice of shutting down their businesses and going to work for the direct lenders to hide their compensation. It is quite troubling to me that individuals continue to take the path of lack of transparency to make our profession sink even deeper in the eyes of the consumer.

My dare to the bankers out there is that when asked how you make your money, BE TRUTHFUL and don’t insult the intelligence of the borrower/consumer. Work on making relationships over the long haul and don’t concentrate so much in the transaction. A relationship is worth so much more and patience will always remain a virtue.