Yield Spread Premium

Yield spread premium was the subject of major regulatory scrutiny before the 2010 Dodd-Frank Act largely replaced it with rules governing mortgage loan originator (MLO) compensation. Under the old YSP model, a wholesale lender's rate sheet might show a par rate of 6.00%. A broker who placed the borrower at 6.50% would receive a 1% YSP from the wholesale lender — $4,000 on a $400,000 loan — as lender-paid compensation. The borrower would see a higher rate but no explicit cash cost at closing, making the compensation largely invisible.

Post-Dodd-Frank, the concept survives under the name 'lender-paid compensation' (LPC). The broker still earns a percentage of the loan amount paid by the wholesale lender, and that cost is still embedded in the rate. The difference is that the compensation must be disclosed on the Closing Disclosure and cannot be combined with borrower-paid compensation on the same loan. On a $500,000 loan, typical lender-paid broker compensation runs 1%–2.5% ($5,000–$12,500).

With a direct lender, no YSP or lender-paid broker compensation exists because the loan officer works for the direct lender — their compensation is a salary or commission paid by the employer, not a markup embedded in your rate. This is why direct lenders often argue that their pricing is more transparent: the rate you see reflects the direct lender's actual cost of funds and profit margin without a broker spread layered on top. When comparing broker-placed loans to direct lender loans, always compare the APR — which includes all lender and broker compensation — rather than just the note rate.