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 loan.

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 says,

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?