New Century’s unbelievable yield spread premium offer

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Let me first start off by saying that this offer was presented to myself and my business partner as owners of our company from our representative at New Century. I have no idea whether this was common practice at New Century, but I believe from talking with our rep that it was. I never received anything in writing to confirm the offer, nor did we ever move forward with it to see if it actually would happen.

With that out of the way let me share with you one of the more disturbing offers we received from our New Century rep in an attempt to earn more of our business by providing bonuses on each loan we closed on loans we brokered. I already described how by being a correspondent lender New Century would pay us a 1% on volume delivered to them over $2,000,000; but this has to do with the broker side of the business.

A little background, on all brokered files you must disclose the yield spread premium, which is the amount of money the lender pays the broker for selling a loan at a particular rate or with particular terms. Usually there is more yield spread premium with a higher rate and a longer prepayment penalty. The yield spread premium is on the settlement statement that borrowers sign at closing, although it is not calculated in the closing charges because it is paid outside of closing by the lender. It is easily missed by many borrowers at signing. When you are a correspondent lender you don’t have to disclose the yield spread premium on the settlement statement, one of the perks of being a correspondent lender.

What our New Century rep proposed to us is the following: New Century would pay us 1% bonus on every loan that we brokered to them. This meant that on a $200,000 loan they would send us an additional $2,000 in compensation. It sounded too good to be true (and was much better than the incentives they were paying on the lending side, where you had to hit $2 million to even get a bonus, this was from dollar one on every loan) and so we inquired "How do you pay us extra with out disclosing it on the HUD for a brokered loan?" We were shocked at the answer.

"You sell [the loan] at whatever you are selling it at and put the proper amount of yield spread premium on your disclosures. When the borrower goes to sign there will just be an extra point in the yield spread premium on their closing statement. Then you just update your initial disclosure to match the final settlement statement." said our New Century representative.

Let’s pick our jaw up off the floor and think about this for a second. Here is a New Century representative telling us to do the following: (1) stick an extra point on the back of each loan to unsuspecting borrowers at closing without previously disclosing it (2) change initial disclosures to reflect the extra point after the fact. Does any one else see a major problem with this?

This is in violation of all sorts of laws. The fact that they were promoting it as a way for us to make more money was surreal. My business partner and I decided we didn’t want anything to do with it and at that point decided that we were done with New Century. It was just slimy – and we didn’t get in to this industry to slide around in the muck like everyone else. They could go take that down the street to any other mortgage broker who surely jumped at the opportunity to earn an additional point on every loan they cranked through NCEN.

So when you start to hear more of the horror stories come out of New Century – lean towards believing them; because the stuff I heard from our rep made my head spin.