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SUMMARY
The Home Mortgage Disclosure Act (HMDA), as implemented by the Federal Reserve Board's Regulation C,
has been revised to provide pricing data on higher-priced mortgage loans reported under Regulation C that are more
consistent with prevailing mortgage market pricing over time. These changes will facilitate regulatory compliance
by conforming the test for rate spread reporting under Regulation C to the definition of higher-priced mortgage loans
under Regulation Z. The changes are effective October 1, 2009. The amendments to Regulation C were finalized after a
comprehensive review by the Federal Reserve Board.
Initially, when the Board adopted Regulation C's rate spread reporting requirement, the objective was to cover
substantially all of the subprime mortgage market while generally avoiding coverage of prime loans. To do this,
Regulation C stipulated that rate spread be calculated using a Treasury yield benchmark. The advantages of
using the Treasury yield table as the benchmark were that Treasuries are traded in a highly liquid market,
Treasury yield data are published for many different maturities and can easily be calculated for other maturities,
and the integrity of published yields is not subject to question. Since the calculation of the rate spread became a
requirement of HMDA reporting in 2004, HMDA reporters and others have identified shortcomings of the Treasury
yield benchmark. The two major disadvantages to using Treasury yields to set the HMDA rate spread include:
- The spread between Treasuries and mortgage rates change in the short term and in the long term making it
difficult to determine a truly comparable Treasury security for a given mortgage loan.
- The current method of matching a contract term to a "comparable" Treasury security does not account for
the fact that very few loans reach their full maturity, and causes significant distortions in the yield curve shape.
These distortions can be misleading and might influence the preferences of lenders to offer certain type loan products
in certain environments.
In July of 2008, the Board proposed changing the rate spread reporting benchmark. The proposed
new benchmark will use a survey-based estimate of market Annual Percentage Rates (APRs) for the lowest-risk prime mortgages,
referred to as the "Average Prime Offer Rate," for comparable types of transactions. The new
tables “Average Prime Offer Rate-Fixed” and “Average Prime Offer Rate-Adjustable” will be updated
weekly to provide more timely information on comparable products. Lenders will now report the
spread between the loan’s APR and the Average Prime Offer Rate of a comparable type if the spread
is equal to or greater than 1.5 percentage points for a first lien loan (or 3.5 percentage points for
a subordinate lien loan).
These changes on how the rate spread is calculated will provide pricing data on higher-priced mortgage
loans reported under Regulation C that are more consistent with prevailing mortgage market pricing
over time. This will make data reporting more predictable. The changes will also facilitate
regulatory compliance by conforming the test for rate spread reporting under Regulation C to the
definition of higher-priced mortgage loans under Regulation Z.
REGULATORY CHANGES
As indicated in the above summary, requirements for reporting of rate spread has changed.
Beginning October 1, 2009, lenders must report the spread between the Annual Percentage Rate (APR)
and a survey-based estimate of APRs currently offered on prime mortgage loans of a comparable type.
Lenders may determine the new rate spread utilizing the “Average Prime Offer Rate-Fixed” table for
fixed rate loans and the “Average Prime Offer Rate-Adjustable” table for adjustable rate loans.
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