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Rate Spread Reporting Rules Revised

Analysis of HMDA rules by Federal Reserve Board

January 21, 2009

By RICHARD J. ANDREANO
Partner, Weiner Brodsky Sidman Kider PC


The Federal Reserve Board revised the Home Mortgage Disclosure Act rules to modify the method of determining when the rate spread for a mortgage loan must be reported under HMDA.

The revised rules are effective on Oct. 1, 2009, and must be followed for loan applications taken on or after that date. In addition, the rules apply to loans closed on or after Jan. 1, 2010 -- regardless of when the application was taken.

The modified method to determine when the rate spread for a loan must be reported under HMDA is same method that will be used to determine what constitutes a "higher-priced mortgage loan" under previously adopted Truth in Lending Act rules that also are effective on Oct. 1.

Lenders are currently required to report rate-spread data when the annual percentage rate on a first lien is at least 3.0 percent above the comparable Treasury yield. The threshold on junior liens is 5.0 percent. Loans for which rate-spread information must be reported under HMDA commonly are referred to as "trigger loans." The current method used to determine whether a loan is a trigger loan under HMDA is similar to the method used to determine if a loan is subject to the Home Ownership and Equity Protection Act provisions of the TILA based on the APR.

But the board recognized that the use of yields on Treasury securities to determine HOEPA loans under TILA and trigger loans under HMDA is imperfect. Mortgage rates do not vary in lock-step with Treasury yields. Additionally, for HOEPA and HMDA determination purposes, lenders must use the yield for a Treasury security with a comparable maturity to the mortgage loan, but typically mortgage rates are not set based on yields for long-term instruments.

For instance, while it is common to have a 30-year mortgage loan, the rates for such loans typically are based on yields for instruments with much shorter terms than 30-year Treasury securities. The board has noted for several years that this short-term/long-term rate factor can result in significant variations in the number of loans reported as trigger loans under HMDA from year-to-year based on market changes in the spread between short-term and long-term interest rates, and not changes in mortgage loan pricing.

While similar methods are used to determine loans that are subject to the HOEPA provisions of TILA and trigger loans for which rate-spread information must be reported under HMDA, the HOEPA method is based on statutory provisions contained in the TILA, whereas the HMDA method is based solely on rules adopted by the board. As a result, while the board can freely modify the method used to determine trigger loans under HMDA, it does not have the same freedom with regard to defining what is a HOEPA loan. (As noted above, the board previously modified the TILA rules to add the new category of "higher-priced mortgage loans" that are defined using the same methodology set forth in the revised HMDA rules.)

Under the revised HMDA rules, a company must report the rate spread for a loan when the APR exceeds the average prime-offer rate by at least 1.5 percent for a first mortgage and 3.5 percent for a subordinate lien as of the date the interest rate for the loan is set. The "average prime-offer rate" is defined as "an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage loans that have low-risk pricing characteristics."

In the preamble to the revised HMDA rules, the board advises that at least initially it will calculate the average prime-offer rate using Freddie Mac's Primary Mortgage Market Survey. The survey contains pricing data for one-year and 5/1 variable-rate loans and for 15- and 30-year fixed rate loans. The board will derive average prime offer rates for 14 loan products using the methodology set forth in the revised rules. The 14 loan products will consist of six variable rate products and eight fixed rate products. The specific loan products will include variable rate loans with initial fixed-rate periods ranging from one to 10 years and fixed-rate mortgages with terms up to 30 years.

For ARMs with initial fixed-rate periods or fixed-rate loans with terms that differ from the published ARMs or fixed-rate loans, the average prime-offer rate for the loan with the closest initial fixed-rate period or term, as applicable, should be used.

The board will publish tables containing the average prime offer rates weekly on the Web site of the Federal Financial Institutions Examination Council. Currently, the FFIEC Web site includes a rate-spread calculator to determine trigger loans under current rules. The board plans to publish the tables with average prime offer rates generally each Friday, and the rates will be effective on the following Monday.

For example, using this approach on Friday Oct. 9, the board would publish new average prime offer rates dated Oct. 12 that are effective from Oct. 12 to Oct. 18. Even though the new rates are published, the new rates would not be used for loans with rates that are set before Oct. 12. For example, if the rate for a loan is set on Oct. 10, the average prime offer rates dated Oct. 5 would be used to determine if the loan is a trigger loan.

The revised rules provide the date that the rate is set by the reporting company for the final time before closing is the date to use for purposes of determining the applicable average prime-offer rate. If there is no lock-in agreement that sets the rate, the relevant date is the date on which the company, using whatever method it employs, sets the rate for the final time before closing.

There appears to be an issue regarding when a rate is set for the final time.

The revised HMDA rules provide as follows: "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. If a rate is re-set 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 re-set for the final time before closing."

In the preamble to the revised rules, the board advises, "If a loan's rate may change, for any reason, then it has not yet been set for the final time before closing." This statement suggests that if there is any potential for a change, a rate is not finally set. For example, the statement suggests that if a rate is set pursuant to a lock-in agreement that contains a float-down option, then even if the option is not exercised the rate is not set until such time as the option could no longer be exercised and no other changes to the rate could occur.

The board had proposed to make the revised rules effective on Jan. 1, 2009, to provide for a uniform reporting method for all of 2009 data. Parties commenting on the proposed rules expressed concern regarding the ability of companies to implement the necessary changes by then. The board decided to delay the effective date until Oct. 1, 2009, which is the same date that the TILA rules for higher-priced mortgage loans become effective.


Richard J. Andreano is a partner at the Washington, D.C.-based law firm of Weiner Brodsky Sidman Kider PC. He focuses on regulatory compliance, transactional and administrative matters for residential housing and financial clients. He graduated with honors from the The George Washington University Law School, J.D., in 1983.
e-mail Rich at [email protected]

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