Why Bankers Don’t Disclose SRP - Part One
Filed under: SRP, Underwriting, YSP — admin @ 12:12 pm
Brokers have been required to disclose YSP (yield spread premium) on the HUD and GFE to their borrowers for years now, while bankers are not required to disclose their SRP (service release premium). The argument has been bantered around for years by brokers that this creates an unfair playing field and that bankers should be required to disclose SRP to create parity.
This piece will attempt to explain the fundamentals of why it is not possible to disclose SRP; however it makes no attempt to address the debate on the clarity, equity , or illumination of YSP disclosure. Ideally, both sides will gain greater clarity of how to address the issue without throwing out a red herring, like bankers disclosing SRP, and deal with the broader issues needed to effect real changes in consumer protection, parity in opportunity and mortgage reform.
How you are compensated for a loan is a function of what you are selling. As a broker, you are selling the origination of a loan. The function of the broker for production really ends at loan submission and the clearing of underwriting conditions to produce a final “clear to close” (CTC) underwriting approval. While the broker may continue to facilitate the closing, the broker’s responsibility (EPD and Fraud aside) ends with the Final CTC Underwriting Approval. The broker can then, through closely controlled technology, execute ordering of documents or assist in the audit of the HUD, but this is wholly limited by the requirements dictated by the wholesale investor (WI) funding the loan.
The closing package is in the name of the WI, and the funding is executed by the WI. The WI, in truth and reality, owns the loan. All responsibility for post-funding resolution lies with the WI. The broker’s compensation is defined by what they charged directly to the borrower on the HUD and the amount that they will be paid in YSP for the lock sales price on the HUD. If the loan closes, the broker is considered a payee on the HUD and will receive both their front and back end fees as a function of disbursement.
The broker sells the origination of a loan with a sales price, indicated on the lock, for the specific note rate at which it closed. The WI funds and purchases the loan at the settlement table. The WI then retains loan for servicing or chooses to sell loan at a later date which will potentially earn an SRP. When the loan is funded at the table, it is purchased by the WI.
A banker sells “whole” loans, not the origination of a loan, to an investor. The back-end income of SRP is only guaranteed upon actual purchase of a given loan by an investor, not merely as a function of funding/disbursement. In addition, a banker can serve several functions that make the issue even more complex. Bankers are not required to “lock” their loans. Depending upon the WI’s secondary and capital markets structure, they may choose to portfolio or service a given loans or they may pool multiple loans with defined criteria for mass sale to specified investors. When the WI chooses to service loans there is no SRP to be disclosed. When pooling loans, SRP is determined by total submission made rather than individually and SRP is not necessarily assigned to a single loan transaction.
To be continued…
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