Effective Oct. 1, 2009, Regulation C, the implementing regulation of the Home Mortgage Disclosure Act (HMDA), imposes new data collection requirements, comparison rates and thresholds for reportable rate spreads.1 Transition rules were developed to provide lenders with guidance for reporting rate spread data for changes effective Oct. 1, 2009. To help data users identify loans closed in 2009 and reported using the new rule, the Board will add a notation to each such loan in the publicly available data reported for 2009. The mandatory compliance for all loans consummated on and after Jan. 1, 2010 will eliminate the need for such notations in years after 2009.
For applications received before Oct. 1, 2009, and originated before Jan. 1, 2010, the revised rules for determining rate spread do not apply and lenders should calculate the rate spread using the “Treasury Securities of Comparable Maturity under Regulation C.”2
Applications before 10/01/09, but originated before 01/01/10
|Lien status||Rate thresholds|
|First lien||Three percentage points or more over the comparable Treasury security yield|
|Subordinate liens||Five percentage points or more over the comparable Treasury security yield|
1. Determine the Treasury yield date.
2. Determine the Treasury yield corresponding to the loan term.
3. Determine the spread between the relevant Treasury yield and the disclosed annual percentage rate (APR).
4. Determine the lien status.
► For applications received on or after Oct. 1, 2009 and for loans originated on or after Jan. 1, 2010 (regardless of their application dates), lenders should use the calculation method described in the following table:
Applications on or after 10/01/094
|Lien status||Rate thresholds|
|First lien||1.5 percentage points above the applicable average prime offer rate|
|Subordinate liens||3.5 percentage points above the applicable average prime offer rate|
1. Determine the amortization type.
2. Determine the lock date.
3. Determine the Average Prime Offer Rate (APOR) corresponding to the initial rate term.
4. Determine the spread between the relevant APOR and the disclosed annual percentage rate (APR).
6. Determine the lien status.
► The Average Prime Offer Rate (APOR) is the new index developed by the Federal Reserve Board (Board).5 Initially, the Board will base the rate on the Freddie Mac Primary Mortgage Market Survey (PMMS) which is updated on a weekly basis.6 While the APOR is based on the Freddie Mac rates, they are not one and the same. The Board has developed a very complicated formula from which it will expand Freddie Mac’s four rates posted weekly to a total of 14 mortgage products (six variable rates and eight non-variable rates). The Board will publish the APORs on a weekly basis on the Federal Financial Institutions Examination Council’s (FFIEC) Web site.7 Rates are published on Fridays and are effective on Mondays.
Effective Oct. 1, 2009, lenders are required to report the spread between the APR and the APOR for mortgage loans of a comparable type (the “rate spread”) for loan originations in which the rate spread meets or exceeds certain thresholds specified by the Federal Reserve Board in Regulation C.
►The following chart depicts when the rate spread must be reported:
Reporting rate spread8
|Report spread||Do not report spread|
|Originations of home purchase loans||Applications that are incomplete, withdrawn, denied or approved but not accepted|
|Originations of dwelling-secured home improvement loans||Purchased loans|
|Originations of refinanced loans||Unsecured home improvement loans|
► FFIEC has updated its rate spread calculator for Home Mortgage Disclosure Act (HMDA) purposes, in connection with the Oct. 1, 2009 Regulation C requirement to report rate spreads that trigger higher priced mortgage loans (HPML) coverage rather than rate spreads between a Treasury rate and the loan’s APR. (This calculator can be used to manually to test for HPML. It cannot be used to calculate the [Homeownership and Equity Protection Act] HOEPA status, which requires a different calculation.)
► New FFIEC rate spread calculator: www.ffiec.gov/ratespread/newcalc.aspx.
The FFIEC calculator will calculate rate spreads for both fixed and variable rate products. Directions for using the calculator can be found by clicking on the calculator’s Web page.
► Setting the rate9
The relevant date to use to determine the APOR for a comparable transaction is the date on which the loan’s interest rate is set by the lender for the final time before closing:
1.If an interest rate is set pursuant to a “lock-in” agreement between the lender and the borrower, then the date on which the agreement fixes the interest rate is the date the rate was set and confirmed by lender.
2. If a rate is reset after a lock-in agreement is executed (for example, because the borrower exercises a float-down option or the agreement expires), then the relevant date is the date the rate is reset by lender for the final time before closing.
3. If no lock-in agreement is executed, then the relevant date is the date on which the lender sets the rate for the final time before closing.
► HOEPA reporting (Homeownership and Equity Protection Act)
Although a new test for HPML was added to HOEPA as a result of the above-outlined 2008 changes to Regulation Z, lenders will still establish HOEPA status using an APR and points and fees trigger tests.
The fees trigger may cause a loan to fall under HOEPA even if the loan's rate spread would not be reportable. If the loan exceeds either the APR or points and fees triggers, its HOEPA status must be reported on the HMDA Loan Application Register (LAR) using Code 1 (for loans that a lender originates or purchases that are subject to HOEPA restrictions because the APR or the points and fees on the loan exceed the applicable HOEPA triggers).
The difference in the HOEPA test and the rate spread test is the metric used to determine HOEPA status and rate spread calculations. As currently required by Regulation Z, HOEPA will continue to require lenders to use the H.15 statistical release table as the source of Treasury yields, while the rate spread approach uses new tables developed by the Board titled “Average Prime Offer Rate-Fixed” and “Average Prime Offer Rate-Adjustable.”10
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Jonathan Foxx, former chief compliance officer for two of the country’s top publicly-traded residential mortgage loan originators, is the president and managing director of Lenders Compliance Group, a mortgage risk management firm devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456.
1-Regulation C, 12 CFR 203, Final Rule.
2-Source: St Louis Fed: Regulation C Amendments, Transition Rules.
3-Use the rate lock-in date on the loan to first determine the applicable Treasury yield date. Then correlate that date to the 15th of the preceding month (1) if the rate is set between the 1st and 14th of the month or (2) the 15th of the current month if the rate is set on or after the 15th day. After determining the appropriate Treasury yield date, identify the Treasury yield of a comparable maturity from the “Treasury Securities of Comparable Maturity under Regulation C” table. Compare this Treasury yield to the APR at consummation to calculate the rate spread. If the difference between the APR and the Treasury yield is equal to or greater than three percentage points for first liens, or five percentage points for subordinate liens, report the amount of the rate spread. If the difference is less than the applicable threshold, “NA” will be reported in the rate spread field on the HMDA LAR.
4-Op. cit. 2, Rate Spread.
5-Average prime offer rates are annual percentage rates derived from average interest rates, points and other loan pricing terms offered to borrowers by a representative sample of lenders for mortgage loans that have low-risk pricing characteristics. To obtain average prime offer rates, the Board uses a survey that meets these criteria and also provides pricing terms for at least two types of variable-rate transactions and at least two types of non-variable-rate transactions. An example of such a survey is the Freddie Mac Primary Mortgage Market Survey (PMMS).
6-The “average prime offer rate” is survey-based, and, for the foreseeable future, the Federal Reserve Board plans to use a specific survey currently published by Freddie Mac. The PMMS can be found at www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp.
8-Op. cit. 2, Pricing Data.
9-Appendix A to Part 203 (HMDA, Regulation C), I, G, 1 (2).
10-Op. cit. 7.