In an example of the kind of pace-setting research that has made them the most useful resource on the subprime lending crisis, the Center for Responsible Lending released an important report today (pdf) on the role brokers play in loans to borrowers with lower credit scores.
The report finds that mortgage brokers -- who advertise that they will find consumers the best deal -- actually cause subprime borrowers to end up paying thousands of dollars more for loans. Analyzing nearly 2 million loans over a two year period, the report found a huge difference between what subprime borrowers pay for loans using a broker vs. going directly to a lender:
We find significant differences between broker and lender pricing on home loans, primarily on mortgages originated for borrowers with weaker credit histories. During the first year of the loan, borrowers with credit profiles in the subprime range pay statistically more for brokered loans than they would have if they had obtained their loan directly from a lender. Over a four-year period, a typical subprime borrower pays over $5,000 more, and over the 30-year life of the loan, the cost gap grows to almost $36,000.
Interestingly, borrowers with better credit scores didn't pay more using brokers. Why? One culprit, CRL speculates, is Yield-Spread Premiums (YSPs) -- an extra payment that brokers receive for setting consumers up with loans that charge a higher interest rate than they really qualify for. The Center recommends that YSP's, which effectively give brokers an incentive to steer vulnerable borrowers towards more costly loans, be banned.