Brokered Subprime Loans Cost More

Study says that borrowers who go directly to the lender pay less.

By SHARE

Subprime borrowers who use brokers pay "significantly more" than those who go directly to the lender, according to a study by the Center for Responsible Lending.

The research—the first to empirically examine the effect of broker compensation on a broad spectrum of borrowers—reveals troubling patterns. The most important is that, for borrowers with weak credit, brokered mortgages carry higher interest rates than the same loans obtained directly from a retail lender. On a typical loan of $166,000, a subprime borrower with a brokered mortgage will pay $5,222 more in the first four years of the loan. Over the 30-year span of a loan, the cost difference grows to almost $36,000.

The report reached the following conclusions:

Kickbacks from lenders—known as "yield spread premiums"—give brokers a strong financial incentive to steer borrowers into overpriced products.

A lack of transparency and the complexity of the loans in the subprime market make it all but impossible for consumers to know if they are being overcharged.

Policymakers should (1) ban practices that give brokers an incentive to overcharge subprime borrowers, (2) ensure that lenders take responsibility for brokered loans made in their name, and (3) set standards requiring brokers to serve customers' interests.

Press release is here.

Full report is here.

TAGS:
subprime mortgages
loans

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