Hidden Fees in Mortgages and Credit Cards

Have you ever wondered where the enormous profits being booked by various bits

of the financial sector come from? Elizabeth Warren, whom I interviewed

in June, has an excellent blog called Credit

Slips which specializes, among other things, in revealing fees the existtence

of which many of us never suspected.

Today, Warren mentions

that she had an op-ed

in the Boston Globe last week on the subject of what the mortgage industry

likes to call a "yield spread premium (YSP)" or what she likes to

call "a bribe to steer [borrowers] to the loan that is more expensive for

[them] and more profitable for the lender".

Apparently the op-ed resulted in Warren receiving large amounts of hate mail;

a letter

to the editor from a mortgage originator said that the fee is no more than

"the vehicle used to compensate mortgage brokers for the professional service

they provide to homebuyers". But clearly the incentive system is all screwed

up here: the broker is purportedly working on behalf of the borrower, but the

broker’s fee can skyrocket if the borrower is pushed into an unsuitably-expensive


I’ve said

before that brokers should have a fiduciary responsibility to the homebuyers

they’re representing, and that borrowers should be able to sue their brokers

for egregious misbehaviour. But in general it would be a great start if brokers

were simply honest and up-front about how much they get paid and how. The secretiveness

surrounding brokers’ fees only makes the honest brokers more suspect. As Warren


The full YSP is not disclosed until, at most, 24 hours before closing, and

then only if the buyer knows to ask, and nothing in the disclosure links the

payment to the broker with the fact that the rate is higher than the one the

buyer would qualify for.

Warren also mentioned

on Monday that the fees that merchants pay to credit card companies can vary

enormously according to the type of card being proffered. Many of us know that

American Express charges more than Visa, say – but did you know that all

card companies charge more for corporate and business cards than they do for

personal cards?

It’s all

quite complicated, but essentially there are different "discount rates"

which the card issuers charge. The lowest discount rate is for personal cards

which are swiped in the store; the highest ("non-qualified") discount

rate applies to transactions which are keyed in manually, or to any transactions

involving international, corporate, government, or business credit cards.

It’s the international bit which really gets me. When you use

a credit card abroad, you’re generally charged through the nose for the

privilege, first by the card company and then by the issuing bank. But the card

company actually makes even more than those fees imply, because it also ratchets

up the amount it’s charging the merchant you’re buying from. So long as all

these fees are kept under wraps, no one seems to kick up a fuss – and

if they tried, they wouldn’t get anywhere anyway. After all, what choice do

we have but to pay these fees?

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