Kickbacks or Compensation: The Case of Yield Spread Premiums
affiliation not provided to SSRN
Howell E. Jackson
Harvard Law School
February 19, 2009
Stanford Journal of Law, Business & Finance, Vol. 12, p. 289, 2007
This article addresses whether yield spread premiums are harmful to consumers and, if so, how the practice might be regulated. Yield spread premiums are payments made to mortgage brokers by lending institutions based on the rate of interest charged on a borrower's loan, with higher interest rates producing higher yield spread premiums payments. While the legality and merits of these payments have been hotly debated over the past decade - in federal courts, before Congress, and elsewhere - little academic writing has seriously grappled with the fundamental questions this paper addresses. After describing the regulatory framework for yield spread premiums, the article reviews the unresolved empirical questions underlying the policy and legal debates over these payments. The article then presents an empirical study of approximately 3,000 mortgage financings of a major lending institution, the results of which suggest that yield spread premiums allow mortgage brokers to extract materially higher payments from consumers than in transactions without such payments. Contrary to claims of industry representatives, the study suggests that consumers fail to fully recoup the cost of these payments. Our best estimate is that consumers get less than thirty-five cents of value for every dollar of yield spread premiums. The study also provides evidence that the payment of yield spread premiums may allow mortgage brokers to engage in price discrimination among borrowers, with the least sophisticated borrowers being particularly susceptible to abusive pricing practices. The article concludes with a brief discussion of the implications of these results for the regulation of yield spread premiums.
Number of Pages in PDF File: 73
Keywords: Mortgage, broker, yield spread premium, agency costs, RESPA
JEL Classification: D10, D70, D80, G20, G21, J44, J70, K23, L51
Date posted: February 19, 2009 ; Last revised: March 3, 2009
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