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Pricing Data

Rate Spread

The amended regulation requires that lenders report the spread between the Annual Percentage Rate (APR) and a survey-based estimate of APRs for all applications received on or after October 1, 2009 that are originated. (For applications received before October 1, 2009 and originated before or on December 31, 2009, please see transition rules.) The survey-based APRs, referred to as “Average Prime Offer Rates”, are derived from average interest rates, points, and other pricing terms offered by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. Lenders report the difference between the transaction APR charged on the loan and the Average Prime Offer Rate that is being offered for comparable types of transactions if the difference is equal to or greater than the following thresholds:

The thresholds are intended to ensure, to the extent possible, that pricing data for higher-cost loans are collected and disclosed. At the same time, the thresholds are meant to exclude prime loans from the requirements.

CALCULATING THE RATE SPREAD

The methodology for calculation of the rate spread is outlined in Regulation C. This methodology permits the use of the Average Prime Offer Rate-Fixed and Average Prime Offer Rate-Adjustable tables located on the FFIEC’s web site. The Average Prime Offer Rate-Fixed table is used when the commitment rate is the contract rate for the life of the loan. The Average Prime Offer Rate-Adjustable table is used when the commitment rate is only an initial rate which may be adjusted by the lender as specified by contract during the life of the loan.

After determining the appropriate amortization type table to use, a lender must identify the Average Prime Offer Rate date from the Average Prime Offer Rate tables. This is done by using the most recently available Average Prime Offer Rate as of the rate-lock date based on the term of the loan. All loans locking from Monday through the following Sunday will use the Average Prime Offer Rate with an effective date of Monday, which generally would have been posted on the previous Friday. This rate will then be compared to the APR at consummation to calculate the rate spread.

The following chart provides examples of how to determine the appropriate Average Prime Offer Rate from the Average Prime Offer Rate tables:

If the difference between the APR and the Average Prime Offer Rate is equal to or greater than 1.5 percentage points for first liens or 3.5 percentage points for subordinate liens, the lender will 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.

For purposes of determining the rate spread for adjustable-rate mortgage loans, the applicable Average Prime Offer Rate date for determining the rate spread is different from the 45-day “look-back” period normally used for setting the periodic interest rate adjustments. For interest rate adjustments, lenders must always use the “look-back” period and interest rate index specified in the loan note.

To aid lenders in calculating and reporting rate spreads, the Average Prime Offer Rates to be used for both Average Prime Offer Rate-Fixed and Average Prime Offer Rate-Adjustable will be posted on the FFIEC’s web site and updated weekly. The Federal Reserve Board’s statistical release H.15 table Selected Interest Rates cannot be used for the HMDA rate-spread calculation, although it will continue to be used for HOEPA purposes. Lenders may determine Average Prime Offer Rates themselves if they wish, rather than using the tables on the FFIEC’s web site.

REPORTING RATE SPREAD ON THE HMDA-LAR

HMDA reporters will input the following information to report the rate spread on the HMDA-LAR:

• Enter “N/A” (not applicable) for the following:
  • applications or loans that are not subject to Regulation Z (12 CFR 226).
  • unsecured home improvement loans.
  • loans that the lender purchased.
  • applications that do not result in an origination.
  • loans where the difference between the APR and the Average Prime Offer Rate is less than 1.5 percentage points for first-lien loans or 3.5 percentage points for subordinate lien loans.
• For loans where the rate spread field is applicable:
  • Enter the rate spread on the HMDA-LAR for covered loans where the difference between the APR at consummation and the applicable Average Prime Offer Rate is equal to or greater than the applicable threshold. Enter the rate spread to two decimal places and use a leading zero. For example: If the rate spread is determined to be 3.29 percentage points, enter 03.29 on the LAR. If the percentage is greater than two decimals, round the figure or truncate the digits beyond the two decimal places.

  THE RATE SPREAD CALCULATOR

  To reduce regulatory burden, the FFIEC has developed a Rate Spread Calculator (RSC) to aid lenders in calculating and reporting rate spreads. Lenders can access the calculator on the FFIEC web site. Lenders can also download the “Average Prime Offer Rate” table each week to be used with either in-house or third party systems. The table is already integrated into the web site calculator, but can be used with other systems. Lenders enter pertinent information, and results of the calculation will be provided for review. The web site will allow lenders to perform calculations one transaction at a time or in batches of 10 loans. Version 2009R.2 of the FFIEC’s HMDA Data Entry Software will introduce the rate spread batch utility that permits lenders to import a file for batch processing. Look for the software currently available at http://www.ffiec.gov/hmda/softinfo.htm.

  When using the FFIEC’s calculator, the lender will be prompted to enter four data elements, three of which are not required to be reported under Regulation C (APR, rate lock-in date, loan term). While not reportable, these three data elements are essential to calculating the rate spread. The fourth data element, lien status, is a reportable field. The four data elements are defined as follows:

  Lock-In Date The “lock-in date” is the date on which the interest rate is set. This date determines the Average Prime Offer Rate that will be used to calculate the rate spread. For example, the lock-in date will be the date that a written or oral lock-in agreement between the lender and the borrower is executed. In cases where the rate is re-set because of a float-down option or the agreement expires, the lock-in date is the date on which the rate is re-set for the final time before closing. If no lock-in agreement is executed, the relevant date is the date on which the lender sets the rate for the final time before closing. Loan Term “Loan term” for Fixed Rate products is the time period between consummation of the transaction and the maturity date. It may not always correspond to the amortization period of the loan. For example, a five-year balloon loan may be amortized over 30 years, but the loan term used in the rate spread calculation would be five years. In Adjustable Rate Mortgage (ARM) products there may be a long period to maturity and a contractual feature whereby the rate is fixed for an initial period and then adjusts. The term used in the calculation would be the initial fixed rate period. Loan term is entered in whole years between 1- 50. For terms consisting of a whole number of years and a fraction of a year round to a whole number according to the following rules: Less than .5 should be rounded to the lower term. Greater than .5 should be rounded to the higher term. Loans that are originated and mature in less than 6 months should be rounded to 1 year. Disclosed APR The “Disclosed APR” is the appropriate figure to use in calculating the rate spread and is the APR disclosed on the final Truth in Lending disclosure provided to the borrower. Lien Status “Lien status” refers to whether the loan is secured by a first lien, secured by a subordinate lien, or unsecured. For purposes of calculating the rate spread, only secured transactions are covered.

  
  

  Certain data elements used in calculating the rate spread (APR, rate lock-in date, loan term) should not be reported to your regulator. Data used in calculating the rate spread with an FFIEC utility, web site, or software are not stored in an FFIEC database.

  The following examples illustrate the process for calculating the rate spread and references the “Average Prime Offer Rate” tables to calculate the spread. These tables can be found at http://www.ffiec.gov/ratespread and should be viewed when reading the first two examples. Note that the Average Prime Offer Rate dates and Average Prime Offer Rates used in the examples are for hypothetical purposes and should not be relied upon as actual Average Prime Offer Rates in effect on a specific date.

  EXAMPLE ONE: PROCESS FOR CALCULATING THE RATE SPREAD FACTS: Sue Wade applies for a $250,000 fixed rate loan with NorthCo National Bank to purchase a home. She executes a rate lock agreement on November 10, 2009 with her lender for 7.0 percent for a 15-year loan. She qualifies for the loan, and NorthCo originates the loan on November 30. The mortgage is in a first-lien position. The corresponding APR is 7.35 percent. QUESTION What is the process for calculating the rate spread and how should the spread be reported on the lender’s HMDA-LAR? ANSWER 1. Determine the Amortization type. In order to determine the appropriate “Average Prime Offer Rate” table, identify the amortization type, fixed or adjustable. In this example, the amortization type is fixed. 2. Determine the lock-in date. In order to determine the appropriate Average Prime Offer Rate-Fixed to reference, identify the lock-in date. In this case, the lock-in date is November 10. 3. Determine the Average Prime Offer Rate corresponding to the loan term. Locate the applicable Average Prime Offer Rate effective date in the left-hand column of the table, which is the most recent Monday on the date the rate was set for the final time. In this example, the applicable Average Prime Offer Rate effective date on the “Average Prime Offer Rate-Fixed” table will be November 9, 2009, as posted on the FFIEC HMDA web site on Friday, November 6. To find the relevant Average Prime Offer Rate, identify the applicable Average Prime Offer Rate effective date (November 9, 2009) in the left-hand column of the table and travel across the row until the rate corresponding to the term of the loan has been reached (15 years). Assume that rate is 4.25 percent in this example. 4. Determine the spread between the relevant Average Prime Offer Rate and the disclosed APR. Compare the relevant Average Prime Offer Rate to the disclosed APR and determine the difference or spread. In this example, compare the Average Prime Offer Rate of 4.25 percent with the disclosed APR of 7.35 percent to determine the difference. This difference is 3.10 percentage points. 5. Determine the Lien status. Finally, the rate spread must be considered in light of the lien status. This loan is in the first-lien position. The rate spread of 3.10 percentage points is required to be reported on the HMDA-LAR because it exceeds the threshold for first-lien loans (1.5 percentage points).

  In the above example, we observed the process for calculating the rate spread and how a lender would calculate the spread and report a transaction that occurred and determine the comparable Average Prime Offer Rate. The following series of examples outlines the process for loans involving lock-in dates on or after Friday but prior to Monday, loans with adjustable rates, and loans with balloon terms. In addition, other examples are included to reinforce the rate spread calculations and how the transactions should be reported.

  EXAMPLE TWO: LOCK-IN DATE ON FRIDAY THROUGH SUNDAY OF THE CURRENT WEEK. FACTS: Harry and Sally Jones apply for a $350,000, Adjustable Rate Mortgage loan to purchase a new home. NorthStar State Bank quotes a rate of 5.25 percent for an initial 7 year period. The Joneses agree to the terms and execute a rate lock agreement on December 4, 2009. The Joneses qualify for the loan, and it is originated on December 31, 2009. The mortgage is in a first-lien position. The corresponding APR is 5.75 percent. QUESTION What is the rate spread and how should it be reported on the lender’s HMDA-LAR? ANSWER 1. Determine the Amortization type. In order to determine the appropriate “Average Prime Offer Rate” table to reference, identify the amortization type, fixed or adjustable. In this example, the amortization type is adjustable. 2. Determine the Average Prime Offer Rate lock-in date. In order to determine the appropriate rate on the Average Prime Offer Rate-Adjustable table to reference, identify the lock-in date. In this case, the lock-in date is December 4, 2009. 3. Determine the Average Prime Offer Rate corresponding to loan initial rate term. Locate the applicable Average Prime Offer Rate effective date (November 30, 2009) in the left-hand column of the Average Prime Offer Rate table, which is the most recent Monday before the date the rate was set for the final time. In this example, the applicable Average Prime Offer Rate effective date on the Average Prime Offer Rate-Adjustable table will be November 30, 2009, as posted on the FFIEC HMDA web site on Friday, November 27, 2009 (although a new Average Prime Offer Rate will have been posted on November 27, 2009, the lock-in date is not effective until Monday, November 30, 2009). To find the relevant Average Prime Offer Rate, identify the applicable Average Prime Offer Rate effective date (November 30, 2009) in the left-hand column of the table and travel across the row until the rate corresponding to the initial fixed-rate period of the loan has been reached. For this example, assume the Average Prime Offer Rate for an initial fixed-rate period of 7 years is 4.25 percent. 4. Determine the spread between the relevant Average Prime Offer Rate and the disclosed APR. Compare the disclosed APR and relevant Average Prime Offer Rate and determine the difference or spread. In this example, the difference between the disclosed APR of 5.75 and the Average Prime Offer Rate of 4.25 is 1.50 percentage points. 5. Determine the Lien status. The rate spread must be considered in light of the lien status. The loan is in the first-lien position. In this instance, the lender would report 1.50 in the rate spread field on the HMDA-LAR because the rate spread is equal to or exceeds the 1.5 percentage point threshold for first-lien loans.

   

  EXAMPLE THREE: FIXED RATE LOANS WITH BALLOON FEATURES FACTS: Chris and Kelly Rodriguez contact The Bank of Hargrove to obtain interest rates for a home purchase loan. The bank quotes an interest rate of 5.5 percent on November 1, 2009 for a 30 year mortgage with a 5 year balloon feature. The applicants accept the terms, and the bank verbally locks the rate on November 12, 2009. The mortgage is in a first-lien position. The loan is originated with a corresponding APR of 5.75 percent. QUESTION What is the rate spread and how should it be reported on the lender’s HMDA-LAR? ANSWER 1. Determine the Amortization type. In order to determine the appropriate “Average Prime Offer Rate” table to reference, identify the amortization type, fixed or adjustable. In this example the amortization type is fixed. 2. Determine the lock-in date. In order to determine the appropriate “Average Prime Offer Rate-Fixed” table to reference, identify the lock-in date. In this case, the lock-in date is November 12, 2009. 3. Determine the Average Prime Offer Rate corresponding to the loan term. Locate the applicable Average Prime Offer Rate effective date in the left-hand column of the Average Prime Offer Rate table, which is the most recent Monday on the date the rate was set for the final time. In this example, the applicable Average Prime Offer Rate date on the “Average Prime Offer Rate-Fixed” table is November 9, 2009, as posted on the FFIEC HMDA web site on Friday, November 6. To find the relevant Average Prime Offer Rate, identify the applicable Average Prime Offer Rate date in the left-hand column of the table (November 9, 2009) and travel across the row until the rate corresponding to the term of the loan has been reached. For this example, assume the Average Prime Offer Rate for 5 years (loan maturity) is 4.60 percent. 4. Determine the spread between the relevant Average Prime Offer Rate and the disclosed APR. Using the process described in Examples One and Two, the spread or difference between the disclosed APR of 5.75 and the Average Prime Offer Rate of 4.60 is 1.15 percentage points. 5. Determine the Lien status. The loan is in a first lien position. In this instance, the lender would report “NA” in the rate spread field of the HMDA/ LAR because the spread did not equal or exceed the 1.5 percentage point threshold for first-lien loans.

  EXAMPLE FOUR: SUBORDINATE LIEN POSITION FACTS: Bob and Lindsey Smith decide to remodel their kitchen. After contacting a few contractors for bids, they realize that they will have to borrow the money to complete the project. They explain to Bank of Louisburg that they currently have a first mortgage against their home with some equity. The bank determines that the Smiths qualify for a $25,000 fixed rate loan to be secured by a second mortgage on their home and quotes an interest rate of 7.25 percent for a 10 year term. No rate lock agreement was executed, and the rate was allowed to float. The bank set the rate for the final time on March 19, 2010 before closing the loan on March 25, 2009. Based on the bank’s terms and conditions, the corresponding APR is 7.75 percent. QUESTION What is the rate spread and how should it be reported on the lender’s HMDA-LAR? ANSWER 1. Determine the Amortization type. In order to determine the appropriate "Average Prime Offer Rate" table to reference, identify the amortization type, in this example fixed. 2. Determine the lock-in date. In order to determine the appropriate Average Prime Rate to reference, identify the lock-in date. In this example the rate was set for the final time on March 19, 2010. 3. Determine the Average Prime Offer Rate corresponding to the loan term. Locate the applicable effective date in the left-hand column of the table, which is the Monday before the date the rate was set for the final time. In this example, the applicable Average Prime Offer Rate effective date on the “Average Prime Offer Rate-fixed” table will be March 15, 2010, as posted on the FFIEC HMDA web site on Friday, March 12. To find the relevant Average Prime Offer Rate, identify the applicable Average Prime Offer Rate date in the left-hand column of the table (March 15, 2010) and travel across the row until the rate corresponding to the term of the loan has been reached. For this example, assume the Average Prime Offer for 10 years (loan maturity) is 2.9 percent. 4. Determine the spread between the relevant Average Prime Offer Rate and the disclosed APR. In this instance, the lender would report 4.85 in the rate spread field because the spread was equal to or exceeded the 3.5 percentage point threshold for subordinate-lien loans. 5. Determine the Lien status. The lien is in a subordinate lien position. In this instance, the lender would report 4.85 in the rate spread field because the spread was equal to or exceeded the 3.5 percentage point threshold for subordinate-lien loans.

   

  EXAMPLE FIVE: LOAN APPROVED BUT NOT ACCEPTED FACTS: Henry Wallace decides to build a garage on to his house. He begins shopping for the best loan terms. He contacts First Community Bank and applies for a $30,000 home improvement loan on March 24, 2010. The bank approves the application on March 25, 2010 at an interest rate of 7.5 percent with a loan term of 10 years. On March 26, Mr. Wallace informs the bank that he received a better deal from another lender and will not be accepting the credit offered by First Community Bank. QUESTION Is this application HMDA reportable for First Community Bank? ANSWER Yes, this application for a home improvement loan was underwritten under the standards typically used by First Community Bank, and an offer of credit was extended. QUESTION What is the rate spread and how is the rate spread reported for this application? ANSWER In cases where the application does not result in an origination, the lender should report “NA” in the rate spread field.

  EXAMPLE SIX: FIRST-LIEN REFINANCE OF CURRENT HOME FACTS: The Wilsons decide that they would like to refinance their current Adjustable Rate Mortgage to obtain a fixed interest rate. They contact Low-rate Mortgage Co. to request information on current interest rates. The lender quotes an interest rate of 6.25 percent for a 25-year mortgage. The Wilsons accept these terms and the lender executes a 30-day rate lock agreement on April 19, 2010. The application results in a loan origination on May 15, 2010. Based on the lender’s terms and conditions, the APR is 7.0 percent. The loan will be in a first-lien position. QUESTION What is the rate spread and how should it be reported on the Low-rate Mortgage Company’s HMDA-LAR? ANSWER 1. Determine the Amortization type. In order to determine the appropriate “Average Prime Offer Rate” table to reference, identify the amortization type, in this example fixed. 2. Determine the lock-in date. In order to determine the appropriate Average Prime Rate to reference, identify the lock-in date. In this example, the rate was set for the final time on April 19, 2010. 3. Determine the Average Prime Offer Rate corresponding to the loan term. Locate the applicable effective date in the left-hand column of the table, which is the Monday before the date the rate was set for the final time. In this example, the applicable Average Prime Offer Rate date on the “Average Prime Offer Rate-Fixed” table will be April 19, 2010, as posted on the FFIEC HMDA web site Friday, April 16, 2009. To find the relevant Average Prime Offer Rate, identify the applicable Average Prime Offer Rate date in the left-hand column of the table (April 19, 2009) and travel across the row until the rate corresponding to the term of the loan has been reached. For this example, assume the Average Prime Offer Rate with a comparable maturity of 25 years (loan maturity) is 4.80 percent. 4. Determine the spread between the relevant Average Prime Offer Rate and the disclosed APR. Using the process described in Examples One and Two, the spread or difference between the disclosed APR of 7.0 and the Average Prime Offer Rate of 4.80 is 2.20 percentage points. 5. Determine the Lien status. The loan is in a first-lien position. In this instance, the lender would report 2.20 in the rate spread field because the spread is equal to or exceeds the 1.5-percentage point threshold for first lien loans.

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