As part of our commitment to transparency, Ethical Homes’ Borrower-Managed Lending policy is designed to remove any possible conflict of interest between us and our clients, while giving our borrowers the ability to strike the balance that they want between risk, upfront costs, and long-term interest rates.

To explain how our Borrower-Managed Lending policy works, we first need to to explain how a mortgage broker gets paid. (Loan officers with direct (i.e. non-brokering) lenders get paid in essentially the same way, except that the “YSP” payments discussed below are called “SRP” payments, and the requirements to disclose to borrowers those SRP payments are actually even less strict than the ones for mortgage brokers and YSP–most direct lenders don’t have to disclose SRP payments to the borrower at all.)

When a mortgage broker is considering placing a borrower’s loan with a specific lender, they will determine the rate that the borrower will get by consulting the most recent “rate/lock/price table” for the relevant loan program for that lender. A Rate/Lock/Price table shows how much a particular lender will pay a mortgage broker for originating a loan for a borrower with a given rate locked in for a given period of time. Those payments are known as a “Yield Spread Premium” (YSP), because they increase based on how much yield (i.e. profit) the mortgage broker can secure for the lender. When a mortgage broker convinces a borrower to accept a higher rate, for example, the lender obviously will make more money off of that borrower, so they reward the mortgage broker with a higher YSP payment. Similarly, when a lender agrees to lock in a rate for a borrower before the loan actually closes, the lender views it as losing “potential” money–since there is a chance that during the lock period, interest rates in general will rise, and the lender will be committed to lending money to the borrower at a lower-than-market rate; thus, the shorter the lock period that the mortgage broker secures for the borrower, the higher the YSP payment.

A sample excerpt from a rate/lock/price table for a lender on a given day might look like this (with some color-coding to make it easier to explain):

(Note: This table is for example purposes only, and does not reflect current market rates, nor is it an offer of a specific mortgage product.)

The exact format of a rate/lock/price table varies from lender to lender; in this sample, negative prices are YSP payments to the mortgage broker, given as a percentage of the loan amount–the green cell on the table, for example, has a -1.000 value, meaning the YSP payment to a mortgage broker who originated a loan with that lender at a 5.875% rate with a 15-day rate lock would get paid 1% of the amount of that loan. The blue cell, similarly, shows that if the mortgage broker originates a loan at a 6.250% rate with a 30-day lock, they would get paid 2.25% of the amount of the loan.

What about the positive prices on the table? Those reflect the amount that the lender will charge the mortgage broker (who will usually pass that charge on to the borrower in the form of discount points)–the orange cell on the table has a value of 0.750, meaning the broker would have to pay the lender 0.75% of the loan amount in order to get a 45-day lock on a rate of 5.500%. To recap, in this example:

A mortgage broker can also charge a borrower an “origination fee”, which is in addition to any YSP they might receive. Many brokers will collect up to 4% from the lender (often without disclosing that fact to you), PLUS charge you origination fees of 1-8%, for a total commission of up to 12%.  At Ethical Homes, on the other hand, we always collect the same (low) total commission whether it comes from YSP or origination fees; if the YSP is more than our fixed commission, then we charge no origination fees and rebate any YSP over our commission back to you to cover your closing costs. (Our commission varies according to the complexity of the loan type: 1.5% for conforming conventional loans; 1.5% FHA/VA/USDA loans, conventional loans with mortgage insurance, and conventional loans with piggyback second trusts; and 2% for construction/rehab/commercial loans.)

For example, using the hypothetical rate/lock/price table above and assuming a conventional purchase loan on which we would collect a 1% commission:

The end result? Our Borrower-Managed Lending policy means that we will always earn the same commission, so we will have no incentive to put you into a higher-rate loan than you might qualify for. And we will always show you all of the relevant rate/lock/price combinations for your situation, so that you get to choose which one to use for your loan–which means that you are in control of whether your rate is locked for a shorter or longer period, as well as giving you the freedom to choose between having lower closing costs now or lower interest rates in the long run, depending on which option makes more sense for you.

Full Disclosure: there are a few circumstances where we might accept a total commission that is not exactly the amount discussed above; for example, as part of our myEnergyLoan Green Mortgage offerings, we will lower our commission by up to 1.0% for borrowers who are purchasing or renovating properties that meet certain environmental standards. There are also some circumstances where we are not legally allowed to rebate excess YSP back to a borrower. We will always inform any borrower before they commit to any loan program if the our total commission for that program will not be 1% or if they will not be able to accept a rebate of excess YSP.

If you’ve still got questions about our Borrower-Managed Lending policy works, feel free to ask us for more details.

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Tags: mortgage