[Federal Register Volume 73, Number 207 (Friday, October 24, 2008)]
[Rules and Regulations]
[Pages 63329-63338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-25320]
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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
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Federal Register / Vol. 73, No. 207 / Friday, October 24, 2008 /
Rules and Regulations
[[Page 63329]]
FEDERAL RESERVE SYSTEM
12 CFR Part 203
[Regulation C; Docket No. R-1321]
Home Mortgage Disclosure
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff interpretation.
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SUMMARY: The Board is publishing final rules to amend Regulation C
(Home Mortgage Disclosure) to revise the rules for reporting price
information on higher-priced loans. The rules are being conformed to
the definition of ``higher-priced mortgage loan'' adopted by the Board
under Regulation Z (Truth in Lending) in July of 2008. Since 2004,
Regulation C has required lenders to collect and report the spread
between the annual percentage rate (APR) on a loan and the yield on
Treasury securities of comparable maturity if the spread is equal to or
greater than 3.0 percentage points for a first-lien loan (or 5.0
percentage points for a subordinate-lien loan). Under the final rule, a
lender will report the spread between the loan's APR and a survey-based
estimate of APRs currently offered on prime mortgage loans 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).
DATES: The final rule is effective October 1, 2009. Compliance is
mandatory for loan applications taken on and after that date and for
loans that close on and after January 1, 2010 (regardless of their
application dates).
FOR FURTHER INFORMATION CONTACT: John C. Wood, Counsel, or Paul Mondor,
Senior Attorney, Division of Consumer and Community Affairs, Board of
Governors of the Federal Reserve System, Washington, DC 20551, at (202)
452-2412 or (202) 452-3667. For users of Telecommunications Device for
the Deaf (TDD) only, contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background on HMDA and Regulation C
The Home Mortgage Disclosure Act (HMDA), enacted in 1975, requires
depository and certain for-profit, nondepository institutions to
collect, report to regulators, and disclose to the public data about
originations and purchases of home mortgage loans (home purchase and
refinancing) and home improvement loans, as well as loan applications
that do not result in originations (for example, applications that are
denied or withdrawn). HMDA data can be used to help determine whether
institutions are serving the housing needs of their communities. The
data help public officials target public investment to attract private
investment where it is needed. HMDA data also assist in identifying
possible discriminatory lending patterns and in enforcing
antidiscrimination statutes.
The Board's Regulation C implements HMDA. The data reported under
Regulation C include, among other items, application date; loan type,
purpose, and amount; the property location and type; the race,
ethnicity, sex, and annual income of the loan applicant; the action
taken on the loan application (approved, denied, withdrawn, etc.), and
the date of that action; whether a loan is covered by the Home
Ownership and Equity Protection Act (HOEPA); lien status (first lien,
subordinate lien, or unsecured); and certain loan price information.\1\
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\1\ Institutions report these data to their supervisory agencies
on an application-by-application basis using a register format.
Institutions must make their loan/application registers available to
the public, with certain fields redacted to preserve applicants'
privacy. The Federal Financial Institutions Examination Council
(FFIEC), on behalf of the supervisory agencies, compiles the
reported data and prepares an individual disclosure statement for
each institution, aggregate reports for all covered institutions in
each metropolitan area, and other reports. These disclosure
statements and reports are also available to the public.
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Regulation C's requirement to report loan price information took
effect beginning with the collection of data for calendar year 2004. 67
FR 7222 (Feb. 15, 2002); 67 FR 30771 (May 8, 2002); and 67 FR 43218
(June 27, 2002). Institutions must report the difference between a
loan's APR and the yield on Treasury securities of comparable maturity
if that difference is equal to or greater than 3.0 percentage points
for a first-lien loan, or 5.0 percentage points for a subordinate-lien
loan. This difference is known as the rate spread. The Treasury yield
used is as of the 15th day of the month most closely preceding the date
the loan's interest rate was set by the institution for the final time
before closing (rate-lock date). The Board provides Treasury yields for
various maturities, via the Federal Financial Institutions Examination
Council (FFIEC) Web site, to assist institutions in calculating the
rate spread.
II. Summary of Final Rule
On July 30, 2008, the Board published a proposed rule that would
amend Regulation C's requirement to report price information. 73 FR
44189 (July 30, 2008). The Board is publishing final amendments to
Regulation C to adopt a method for determining when the rate spread is
reported that is similar in concept to Regulation C's current method
but different in the particulars. The final rule, like the current
rule, sets a threshold above a market rate to trigger reporting. But
the market rate the Board is adopting is different, and therefore so is
the threshold. Instead of yields on Treasury securities of comparable
maturity, the rule uses a survey-based estimate of market APRs for the
lowest-risk prime mortgages, referred to as the ``average prime offer
rate,'' for comparable types of transactions.
The survey the Board will rely on for the foreseeable future is the
Primary Mortgage Market Survey[supreg] (PMMS) conducted by Freddie Mac.
The Board will conduct its own survey if it becomes appropriate or
necessary to do so. The reporting threshold is set at 1.5 percentage
points above the applicable average prime offer rate for first-lien
loans, and 3.5 points above the applicable average prime offer rate for
subordinate-lien loans. The lender reports the difference between the
transaction's APR and the average prime offer rate on a comparable type
of transaction if the difference is equal to or greater than the
threshold.
The final rule will provide pricing data on higher-priced mortgage
loans reported under Regulation C that are
[[Page 63330]]
more consistent with prevailing mortgage market pricing over time,
which will make data reporting more predictable. The rule also 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.
III. Reasons for Improving HMDA Rate Spread Reporting
When the Board first 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. Since the requirement went into effect, HMDA reporters and
others have on various occasions identified shortcomings of the
Treasury yield benchmark. In July of 2008, the Board proposed changing
the rate spread reporting benchmark. The proposed new benchmark was a
market-based estimated average of prime mortgage rates, derived from
the PMMS. A lender would report the spread between the loan's APR and
the survey-based estimate of average APRs currently offered on prime
mortgage loans 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). This approach would
track the pricing-based coverage test for the new protections for
higher-priced mortgage loans under Regulation Z, adopted by the Board
in July of 2008. 73 FR 44522 (July 30, 2008).
A. Drawbacks of Using Treasury Security Yields
Although there are advantages to using Treasury yields to set the
threshold for reporting price information, there also are significant
drawbacks. Advantages include the facts 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. For
these reasons, Treasuries are also commonly used in federal statutes
for benchmarking purposes.
As recent events have highlighted, using Treasury yields to set the
APR threshold for HMDA rate spread reporting has two major
disadvantages. The most significant disadvantage is that the spread
between Treasuries and mortgage rates changes in both the short term
and in the long term. Moreover, the truly comparable Treasury security
for a given mortgage loan can be difficult to determine accurately.
The Treasury-mortgage spread can change for at least three
different reasons. First, credit risk may change on mortgages, even for
the highest-quality borrowers. For example, credit risk may increase
during economic downturns. Second, competition for prime borrowers can
increase, tightening spreads, or decrease, allowing lenders to charge
wider spreads. Third, movements in financial markets can affect
Treasury yields but have no effect on lenders' cost of funds or,
therefore, on mortgage rates. For example, Treasury yields fall
disproportionately more than mortgage rates during a ``flight to
quality.''
Recent events illustrate how much the Treasury-mortgage spread can
swing. The spread averaged about 170 basis points in 2007 but increased
to an average of about 220 basis points in the first half of 2008. In
addition, the spread was highly volatile in this period, swinging as
much as 25 basis points in a week. Thus, the spread may vary
significantly from time to time, and long-term predictions of future
spreads are highly uncertain. Such changes in the Treasury-mortgage
spread mean that rate spreads for loans with identical credit risk are
reported in some periods but not in others, contrary to the objective
of consistent and predictable coverage over time.
Adverse consequences of volatility in the spread between mortgage
rates and Treasuries could be reduced simply by setting the regulatory
threshold at a high enough level to ensure exclusion of all prime
loans. But a threshold high enough to accomplish this objective would
likely fail to meet another, equally important objective of covering
essentially all of the subprime market. Instead, the Board is adopting
a benchmark index that more closely follows mortgage market rates and
therefore should make reporting more consistent and predictable.
The second major disadvantage of using Treasury yields to set the
threshold is that the truly comparable Treasury security for a given
mortgage loan can be difficult to determine accurately. Regulation C
approximates the ``comparable'' Treasury security on the basis of
maturity: a loan is matched to a Treasury security with the same
contract term to maturity. For example, the regulation matches a 30-
year mortgage loan to a 30-year Treasury security. This method,
however, does not account for the fact that very few loans reach their
full maturity, and it causes significant distortions when the yield
curve changes shape.\2\ These distortions can bias coverage, sometimes
in unpredictable ways, and consequently might influence the preferences
of lenders to offer certain loan products in certain environments.
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\2\ Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner
(2006), ``Higher-Priced Home Lending and the 2005 HMDA Data,''
Federal Reserve Bulletin, vol. 92 (September 8), pp. A123-66.
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For example, variable-rate mortgage loans typically are priced
based on expected maturities that are closer to the loans' initial,
fixed-rate periods than to their full, nominal terms. Especially in a
sharply rising yield curve environment, lenders may be biased toward
offering such products because their pricing terms are established by
reference to their expected actual maturities and, therefore, would
tend to remain well below a set threshold over yields on Treasury
securities that match their much longer, nominal maturities. By
adopting benchmarks that more closely track mortgage market rates and
matching loans to benchmarks by product type, rather than solely by
contractual term to maturity, the Board expects to reduce such
disparities between mortgage loan pricing and the applicable benchmarks
because those benchmarks already will reflect the expected maturities
on which lenders base their pricing.
B. Reasons for Following the Regulation Z Final Rule
As noted above, the Board's objective in setting the rate spread
reporting threshold has been to cover subprime mortgages and generally
to avoid covering prime mortgages. The same purpose underlies the
definition of ``higher-priced mortgage loan'' that the Board adopted
under Regulation Z. For the reasons discussed above, the Board believes
the definition adopted under Regulation Z, when applied to Regulation
C, will better achieve this purpose and ensure more consistent and more
useful HMDA data. Moreover, using the same definition in both
Regulation Z and Regulation C will reduce compliance burdens.
IV. The Board's Final Rule
A. Public Comment on the Proposed Rule
The Board requested comment on (1) the proposal to change the
reporting benchmark from Treasury yields to average prime offer rates;
(2) the Board's plan to use the Freddie Mac PMMS to estimate average
prime offer rates, including comment on whether there are more
appropriate sources of data; (3)
[[Page 63331]]
the method the Board proposed to use to derive average prime offer
rates from the PMMS data, which was published as Attachment I to the
proposal; (4) the proposed 1.5 and 3.5 percentage point thresholds; (5)
the proposed timing for rate spread determination (rate-lock date, with
weekly updating of the average prime offer rate benchmarks); (6) the
proposed implementation date of the amendments; and (7) the costs and
benefits of the proposal generally.
The Board received 21 comment letters on the proposal. Commenters
were virtually unanimous in support of changing the reporting benchmark
from Treasury yields to average prime offer rates, as well as the use
of the PMMS to estimate average prime offer rates. Industry commenters
largely agreed that use of the same test under Regulations C and Z
would reduce regulatory burden. Nearly all commenters agreed that the
proposed changes would result in more accurate HMDA data. And most
commenters agreed with the proposed thresholds over average prime offer
rates of 1.5 and 3.5 percentage points for first-lien and second-lien
loans, respectively. Finally, the majority of commenters favored, or
did not object to, the continued use of the rate-lock date as the best
time for rate spread determinations. Some industry commenters expressed
concern that weekly updates of average prime offer rates would increase
burdens on HMDA reporters. These commenters were not opposed to weekly
updating, per se, but rather as an additional aspect of the
substantial, overall burden arising from the proposal.
Industry commenters strongly opposed the proposed implementation
date of January 1, 2009. A joint comment letter filed by five industry
trade associations argued that their members would be unable to
implement all the necessary systems changes and conduct necessary staff
training by the proposed effective date. Industry commenters also
raised various issues relating to timing and calculation methodology
under the Board's proposal for deriving average prime offer rates from
the PMMS data. The timing and methodology issues are discussed below,
in parts IV.D and IV.E, respectively. The implementation date is
discussed in part V.
B. Rates From the Prime Mortgage Market
To address the principal drawbacks of Treasury security yields,
discussed above, the Board proposed a rule that relies instead on
benchmarks that more closely track rates in the prime mortgage market.
The Board is adopting the use of average prime offer rates
substantially as proposed. The final rule defines an ``average prime
offer rate'' as an APR 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.
Comparing a transaction's APR to this average prime offer rate (defined
as an APR), rather than to an average offered contract interest rate,
should make reporting more accurate and consistent because both rates,
rather than just one of them, will reflect the total cost of credit
that an APR represents. If the spread between a loan's APR and the
average prime offer rate for a comparable transaction 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, the lender must report
the difference under Regulation C. The basis for selecting these
thresholds is explained further below, in part IV.C.
To facilitate compliance, the final rule and commentary provide
that the Board will derive average prime offer rates from survey data
according to a methodology it will make publicly available, and the
Board will publish these rates in two tables (one each for variable-
rate and non-variable-rate loans) on the FFIEC's Web site on at least a
weekly basis. The methodology published as Attachment I to this Federal
Register notice, which will appear together with the tables on the Web
site, provides that comparable transactions are determined by the
initial, fixed-rate period for variable-rate loans and by term to
maturity for non-variable rate loans. The tables will set forth average
prime offer rates for each of 14 products (six variable-rate and eight
non-variable-rate loans), and the methodology provides assignment rules
for all other initial, fixed-rate periods or terms to maturity, as
applicable. The methodology will remain on the Web site along with the
tables. Should it be revised in the future, the Board will republish it
as revised at least several months before such revisions become
effective.
As noted above, the survey the Board intends to use for the
foreseeable future is Freddie Mac's PMMS, which contains weekly average
rates and points offered by a representative sample of creditors to
prime borrowers seeking a first-lien, conventional, conforming mortgage
and who would have at least 20 percent equity. The PMMS contains
pricing data for four types of transactions: ``1-year ARM,'' ``5/1-year
ARM,'' ``30-year fixed,'' and ``15-year fixed.'' PMMS pricing data for
ARMs are based on ARMs that adjust according to the yield on one-year
Treasury securities; the pricing data include the margin and the
initial rate. These data are updated every week and are published on
Freddie Mac's Web site (see http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp).
The Board will use the pricing terms from the PMMS, such as
interest rate and points, to calculate an APR (consistent with
Regulation Z, 12 CFR 226.22) for each of the four types of transactions
that the PMMS reports. These APRs will be the average prime offer rates
for transactions of those types. The Board will derive APRs for other
types of transactions from the loan pricing terms available in the
survey. The method of derivation the Board will use is being published
as Attachment I to this Federal Register notice and will be published
on the FFIEC's Web site along with the tables of average prime offer
rates.
The methodology statement in Attachment I will be implemented
substantially as it was proposed, except that some further details have
been added for additional clarity and to address some technical issues
raised by commenters. These technical issues are discussed below, in
parts IV.E and IV.F. The Board will continue to review the methodology
statement following publication of this Federal Register notice, to
ensure that it is as clear and useable as possible, and may make
further revisions before it is published on the FFIEC's Web site along
with the tables of average prime offer rates. The Board expects to
publish both the tables and the methodology statement, as it will be
implemented when this final rule becomes effective on October 1, 2009,
on the FFIEC's Web site by early January of 2009.
C. Thresholds for Rate Spread Reporting
The Board is adopting thresholds of 1.5 percentage points above the
average prime offer rate for a comparable transaction for first-lien
loans and 3.5 percentage points for second-lien loans, as proposed.
These thresholds are the same as those adopted under Regulation Z's
definition of ``higher-priced mortgage loan'' in the July final rule.
73 FR 44522 (July 30, 2008).
As discussed above, the rate spread reporting requirement was
intended to cover the subprime market and generally exclude the prime
market, and in the face of uncertainty it is appropriate to err on the
side of covering somewhat more than the subprime market. Based on
available data, it appears that the existing thresholds capture all of
the subprime
[[Page 63332]]
market and a portion of the alt-A market. Based also on available data,
the Board believes that the thresholds it is adopting also will cover
all of the subprime market and a portion of the alt-A market. The Board
considered loan-level origination data for the period 2004 to 2007 for
subprime and alt-A securitized pools. The proprietary source of these
data is FirstAmerican Loan Performance.\3\ The Board also ascertained
from a proprietary database of mostly government-backed and prime loans
(McDash Analytics) that coverage of the prime market during the first
three quarters of 2007 at these thresholds would have been very
limited. The Board recognizes that the recent mortgage market
disruption began at the end of this period, but it is the latest period
the Board has been able to study in this database.
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\3\ Annual percentage rates were estimated from the contract
rates in these data using formulas derived from a separate
proprietary database of subprime loans that collects contract rates,
points, and annual percentage rates. This separate database, which
contains data on the loan originations of eight subprime mortgage
lenders, is maintained by the Financial Services Research Program at
George Washington University.
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The Board is adopting a threshold for subordinate-lien loans of 3.5
percentage points. This is consistent with the existing rule under
Regulation C, which sets the threshold over Treasury yields for these
loans two percentage points above the threshold for first-lien loans.
See 12 CFR 203.4(a)(12). The Board recognizes that it would be
preferable to set a threshold for second-lien loans above a measure of
market rates for second-lien loans, but a suitable measure of this kind
does not appear to exist. Although data are very limited, the Board
believes it remains appropriate to apply the same difference of two
percentage points to the thresholds above market mortgage rates.
Commenters explicitly endorsed, or at least raised no objection to,
this approach.
Some commenters raised issues relating to the scope of coverage for
``higher-priced mortgage loans'' under Regulation Z. For example,
commenters suggested either exempting from coverage, or providing
higher thresholds for, certain loan product types, such as loans
exceeding the Fannie Mae and Freddie Mac maximum loan size (jumbo
loans) and loans under Federal Housing Administration (FHA) programs.
Suggestions relating to the scope of coverage were considered and
addressed in the Board's final rule under Regulation Z. 73 FR 44522,
44536-44537; 44539 (July 30, 2008).
The Board remains aware that the spread between prime conforming
and prime jumbo loans currently is unusually wide. If this spread
remains wider than it historically has been when the final rule takes
effect, the rule will cover some prime jumbo loans. While covering
prime jumbo loans is not the Board's objective, the Board does not
believe that it should set the threshold at a higher level to avoid
what may be only temporary coverage of these loans relative to the
long-time horizon for this rule. The Board also continues to believe
that establishing various thresholds for various different product
types would make the regulation inordinately complicated and subject it
to frequent revision, which would not be in the interests of those who
report HMDA data or those who use them. The Board will continue to
monitor the overall market and relative pricing spreads between
submarkets to ensure that the benefits of simplicity and stability
offered by the rule as adopted continue to outweigh the disadvantages
of sometimes inadvertently capturing rate spread data on loans to which
the rule is not intended to apply.
D. Timing of Determining the Rate Spread
When Benchmarks Become Effective
Regulation C currently determines the Treasury yield benchmark as
of the 15th of the month before the rate-lock date. This rule will
determine the applicable benchmark for a transaction more frequently.
The final rule requires a creditor to use the most recently available
average prime offer rate as of the rate-lock date. As the PMMS is
updated weekly, the Board will also update average prime offer rates
weekly. The Board expects that using a more current benchmark will
improve reporting accuracy without significantly increasing regulatory
burden.
To address concerns raised by industry commenters over their
ability to apply timely the most recent benchmarks, the final rule
includes additional explanation, in appendix A, as to the meaning of
``most recently available.'' The Board generally will update the tables
each Friday morning, but the new benchmarks will be dated to indicate
when they are effective, and the effective date will be subsequent to
the date of publication. The ``most recently available'' average prime
offer rates are those most recently effective as of the date the rate
is set. The Board's intention is that updates to the tables made each
Friday will be effective the following Monday, as reflected in the
methodology statement published as Attachment I to this Federal
Register notice. For example, new average prime offer rates applicable
during the week of Monday through Sunday, October 12-18, 2009, would be
posted on the FFIEC's Web site on Friday, October 9, but they would be
dated October 12. Loans that are locked in on October 9 through 11,
including loans locked in on October 9 after the benchmarks dated
October 12 have been posted, would be compared to the average prime
offer rates for comparable transactions dated October 5 (assuming the
loan application was made on or after October 1). In unusual
situations, such as public holidays falling on a Friday, the Board may
not publish new benchmarks on that day. Whenever new benchmarks are
published, however, they always will be dated subsequent to the date of
publication, so that lenders will not be required to apply new
benchmarks the same day they are published. For consistency's sake,
lenders may not apply new benchmarks before the Monday following
publication, even if their systems are capable of applying the new
benchmarks earlier.
When the Rate Is Set
Industry commenters suggested that the time the rate is set should
be flexible enough to accommodate differing methods of locking in rates
used by mortgage lenders. Specifically, they stated that some lenders
employ a ``base rate plus rate adjusters'' system, whereby a lender may
lock in the ``base rate'' as well as various ``rate adjusters'' that
may or may not apply, depending on loan factors to be determined
subsequently (such as an appraisal that results in a different loan-to-
value ratio than previously expected). Thus, although the ``base rate''
has been locked in on a certain date, and all potentially applicable
``rate adjusters'' also may be locked in, the rate still may change
afterwards if the applicability of any ``rate adjuster'' changes.
The Board's intent was not to alter the current meaning of when the
rate is set for the final time before closing. If a loan's rate may
change, for any reason, then it has not yet been set for the final time
before closing. Accordingly, the Board's final rule leaves the relevant
discussion of when the rate is set, in appendix A, unchanged in this
regard.
E. Determination of ``Comparable Transaction''
Assignment Rules
The proposal stated that the Board's tables of average prime offer
rates would indicate how to determine what
[[Page 63333]]
constitutes a ``comparable transaction'' for purposes of matching a
mortgage loan's APR to the appropriate benchmark. Some commenters
interpreted the methodology statement's assignment rules as matching
loans for which the tables contain no exact match to the benchmark of
the next longest term. This interpretation was not the Board's intent.
The Board's intent was to preserve the assignment rules currently
applicable under HMDA. Under those rules, a loan with a term not
represented among the Treasury security terms listed in the table
matches to the Treasury security with the term closest to the loan's
term, and when a loan has a term exactly halfway between two Treasury
security terms it matches to the Treasury security with the shorter of
the two terms. The methodology statement that is published with this
final rule (Attachment I to this Federal Register notice) and that will
accompany the tables on the FFIEC's Web site is revised to clarify the
correct assignment rules for the new tables of average prime offer
rates, which track the existing assignment rules for the existing table
of Treasury yields.
Interpolation Methodology
Industry commenters also recommended a revision to the proposed
method for interpolating estimated APRs for loan products for which
PMMS data are not available. The methodology requires calculating
``Treasury spreads'' (the difference between the PMMS-reported rates
and corresponding Treasury yields) as a first step towards estimating
rates for other products, before ultimately calculating APRs for those
other products. The Board proposed calculating the necessary Treasury
spreads as the PMMS-reported initial rates for one- and five-year
variable-rate loans minus the average yields on one- and five-year
Treasury securities, respectively. These one- and five-year spreads are
used as inputs in estimating APRs for loan products not included in the
PMMS survey. These commenters suggested instead calculating a
``relative'' spread by dividing the PMMS-reported rates by the
corresponding Treasury yields. In structuring the calculation of
Treasury spreads as absolute rather than proportional, the Board
intended to mirror the manner in which the mortgage industry builds
incremental prepayment and credit risk into loan pricing. For this
reason, the Board is retaining the calculation as proposed.
Unusual Loan Products
Some commenters sought clarification on how to determine comparable
transactions for certain unusual loan product types, such as step-rate
loans, loans with balloon payments, and loans with temporary, interest-
only payment terms. The Board believes that the rule as structured
addresses all loan product types. Regulation Z already provides
guidance for the calculation of APRs on loans with unusual payment
terms. The APR calculated and disclosed according to those rules is to
be compared to the average prime offer rate for comparable
transactions. If the APR is higher than it would be in the absence of
any unusual payment terms, the Board sees no reason for establishing
special rules for such products under the new rate spread reporting
test. Determination of ``comparable transactions'' depends solely on
two factors: (i) Whether the loan is variable-rate or not; and (ii) the
length of the initial, fixed-rate period (if variable-rate) or the term
to maturity (if non-variable-rate).
F. Technical Issues
APR Calculation--Payment Schedule Assumptions
In the methodology statement for deriving and estimating APRs from
PMMS data the Board included an assumption that monthly payments would
be rounded to whole cents, thus likely requiring an odd final payment
amount. The Board's intent was to track the way mortgage lenders
actually calculate APRs on their transactions. But rounding payment
amounts to whole cents necessarily requires having a loan amount, which
is not the case for the hypothetical transaction underlying the PMMS
data. Therefore the Board is revising the methodology statement to
provide that the calculation should assume all payments are equal, even
if this results in payment amounts that include fractions of cents.
This revision applies only to the calculation of hypothetical APRs from
PMMS data for use as average prime offer rates; it does not affect
lenders' ability to calculate APRs for disclosure purposes using
payment amounts in whole cents, pursuant to Regulation Z. See 12 CFR
226.17(c)(3)(i).
HOEPA Status Reporting--Sec. 203.4(a)(13)
Although the Board did not propose to revise Sec. 203.4(a)(13),
some commenters pointed out that, as a result of the amendments to
Regulation Z in the Board's July 30, 2008 final rule, the language in
Sec. 203.4(a)(13) now could be considered ambiguous. Section
203.4(a)(13) requires the reporting of ``[w]hether the loan is subject
to the Home Ownership and Equity Protection Act of 1994.'' Until the
July 30, 2008 final rule, this unambiguously referred to loans subject
to the original protections of HOEPA, implemented through Regulation
Z's Sec. 226.32, 12 CFR 226.32. The July final rule, however, created
a new Sec. 226.35 of Regulation Z, 12 CFR 226.35, which affords
certain protections for mortgage loans that meet or exceed its coverage
test (the same test that is implemented for HMDA rate spread reporting
purposes by this final rule). As the Board created the Sec. 226.35
protections pursuant to its authority under HOEPA, 15 U.S.C.
1639(l)(2), the commenters expressed concern that loans that are
subject to those new protections could be seen as being ``subject to''
HOEPA.
Appendix A to Regulation C, Paragraph I.G.3, requires reporting if
a loan is subject to HOEPA, ``as implemented in Regulation Z (12 CFR
226.32).'' To eliminate any possibility of misinterpretation, however,
the Board is revising the language of Sec. 203.4(a)(13) to conform to
the existing rule, as expressed in appendix A.
V. Effective Date
The Board proposed an effective date of January 1, 2009. Industry
commenters expressed serious concerns, however, that the proposed
effective date would afford too little time, and would generate
substantial costs, to implement the necessary systems changes and staff
training. For the following reasons, the Board is adopting an effective
date of October 1, 2009.
Under the July 30, 2008 final rule, the Regulation Z amendments
concerning higher-priced mortgage loans are effective on October 1,
2009 and apply to loans for which applications are taken on or after
that date. In the proposed rule, the Board sought to avoid changing
rules for HMDA rate spread reporting during a calendar year. But, as
the proposal noted, if the Board were to make compliance with this
final rule mandatory January 1, 2010, from October through December of
2009 lenders would have to comply with two different rules for
identifying higher-priced mortgage loans. These reasons led the Board
to propose a January 1, 2009 effective date.
The Board recognizes that several factors would make compliance by
January 1, 2009 especially difficult and costly for industry. First, as
commenters pointed out, HMDA reporters must capture two additional data
elements to apply the new test: (i) Whether the loan is variable-rate
or not; and (ii) if variable-rate, the initial, fixed-rate
[[Page 63334]]
period. While these data usually reside in lenders' origination
systems, they may be difficult to access, capture, and import into HMDA
compliance systems; many industry commenters indicated that these are
two separate, non-integrated systems and that creating the necessary
interfaces between them will be an extensive and costly project.
Second, industry commenters stated that the period over the end of one
year and the beginning of the next year is a particularly challenging
timeframe in which to implement changes to HMDA reporting systems, as
it coincides with annual reporting under HMDA and other laws and
regulations. During this period, lenders generally ``freeze'' their
systems to ensure that their reports for the just-completed year are
complete and accurate, in compliance with current rules, thus
introducing new rules is particularly challenging in this timeframe.
Third, mortgage lenders face a number of other compliance-driven
systems changes during the proposed timeframe.\4\
---------------------------------------------------------------------------
\4\ The joint, industry trade groups' comment letter recited six
other current sources of significant compliance systems changes,
including certain FHA program changes, changes to Regulation Z
necessitated by the Mortgage Disclosure Improvement Act of 2008,
Title V of Division B of the Housing and Economic Recovery Act of
2008, Public Law 110-289, 122 Stat. 2654, approved July 30, 2008,
and numerous state law changes.
---------------------------------------------------------------------------
As noted above, the new protections for higher-priced mortgage
loans under Regulation Z become effective October 1, 2009. As the
coverage test necessary to determine whether those protections apply is
identical to the HMDA rate spread reporting test adopted here, the
Board has concluded that making the HMDA test effective on the same
date will impose little additional burden on HMDA reporters.
For the foregoing reasons, the Board is adopting an effective date
of October 1, 2009. Lenders will use the new rate spread reporting test
on loans for which applications are taken on and after October 1, 2009
and for all loans consummated on or after January 1, 2010 (regardless
of their application dates). 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 with the new rule for all loans consummated on and
after January 1, 2010 will eliminate the need for such notations in
years after 2009. Thus, for loans for which applications were taken
before October 1, 2009 and that are consummated in 2009, the revised
rules do not apply. Lenders will apply the existing rate spread
reporting test, using Treasury security yield benchmarks, for those
loans. For loans for which applications were taken before October 1,
2009 and that are consummated in 2010 or later, the revised rules
apply.
VI. Paperwork Reduction Act
In accordance with section 3506 of the Paperwork Reduction Act of
1995 (44 U.S.C. Ch. 35; 5 CFR Part 1320 Appendix A.1), the Board has
reviewed the final rule under the authority delegated to the Board by
Office of Management and Budget (OMB). The Federal Reserve may not
conduct or sponsor, and an organization is not required to respond to,
this information collection unless it displays a currently valid OMB
number. The OMB control number is 7100-0247.
The information collection requirements of this rule appear in 12
CFR part 203. The information collection is mandatory under 12 U.S.C.
2801-2810. It generates data used to help determine whether financial
institutions are serving the housing needs of their communities, to
help target investment, to promote private investment where it is
needed, and to provide data to assist in identifying possibly
discriminatory lending patterns and in enforcing antidiscrimination
statutes.
The respondents are all types of financial institutions that meet
the tests for coverage under the regulation. Under the Paperwork
Reduction Act (PRA), however, the Federal Reserve accounts for the
burden of the paperwork associated with the regulation only for state
member banks, their subsidiaries, subsidiaries of bank holding
companies, U.S. branches and agencies of foreign banks (other than
federal branches, federal agencies, and insured state branches of
foreign banks), commercial lending companies owned or controlled by
foreign banks, and organizations operating under section 25 or 25A of
the Federal Reserve Act (12 U.S.C. 601-604a; 611-631). Other federal
agencies account for the paperwork burden for the institutions they
supervise. Respondents must maintain their loan/application registers
and modified registers for three years, and their disclosure statements
for five years.
The Board has determined that the data collection and reporting are
required by law; completion of the loan/application register,
submission to the Board, and disclosure to the public upon request are
mandatory. The data, as modified according to the regulation, are made
publicly available and are not considered confidential. Information
that might identify an individual borrower or applicant is given
confidential treatment under exemption 6 of the Freedom of Information
Act, 5 U.S.C. 552(b)(6).
On July 30, 2008, a notice of proposed rulemaking (NPR) was
published in the Federal Register. 73 FR 44189 (July 30, 2008). The NPR
indicated that current burden estimates for Regulation C would not
change, other than a one-time increase in burden to modify HMDA
reporters' systems. No comments specifically addressing the burden
estimate were received. Therefore, the current burden estimates will
remain unchanged. The current total annual burden to comply with the
provisions of Regulation C continues to be estimated at 156,910 hours
for 680 Federal Reserve-regulated institutions that are deemed to be
respondents for the purposes of the PRA. The reporting, recordkeeping,
and disclosure burden for this information collection is estimated to
vary from 12 to 12,000 hours per respondent per year, with an average
of 242 hours for state member banks and an average of 192 hours for
mortgage banking subsidiaries and other respondents. This estimated
burden includes time to gather and maintain the data needed, review the
instructions, and complete the register. The Board estimates that
respondents regulated by the Federal Reserve will take, on average, 16
hours (two business days) to revise and update their systems to comply
with the new threshold for rate spread reporting. This one-time
revision will increase the burden by 10,880 hours to 167,790.
The Board has a continuing interest in the public's opinions of its
collections of information. At any time, comments regarding the burden
estimate, or any other aspect of this collection of information,
including suggestions for reducing the burden, may be sent to:
Secretary, Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551, with copies of such comments sent
to the Office of Management and Budget, Paperwork Reduction Project
(7100-0247), Washington, DC 20503.
VII. Regulatory Flexibility Analysis
In accordance with section 4 of the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601-612, the Board is publishing a final regulatory
flexibility analysis for the proposed amendments to Regulation C. The
RFA requires an agency either to provide a final regulatory flexibility
analysis with a final rule or certify that the final rule will not have
a significant economic impact on a substantial number of small
entities. An entity is considered ''small'' if it has $165
[[Page 63335]]
million or less in assets for banks and other depository institutions;
and $6.5 million or less in revenues for non-bank mortgage lenders,
mortgage brokers, and loan servicers. The Board did not receive any
comments contending that the proposed rule would have a significant
impact on various businesses or on its initial regulatory flexibility
analysis. Based on its analysis and for the reasons stated below, the
Board believes that this final rule will not have a significant
economic impact on a substantial number of small entities.
A. Statement of the Need for, and Objectives of, the Final Rule
The Board is adopting amendments to Regulation C to make the rules
for reporting higher-priced loans in the annual HMDA data consistent
with the definition of ``higher-priced mortgage loan'' in the
amendments to Regulation Z (Truth in Lending) that the Board adopted in
final form on July 30, 2008. The amendments are intended to reduce
regulatory burden by allowing mortgage lenders to use a single
definition of higher-priced loan, rather than different definitions
under the two regulations. The amendments are also intended to result
in more useful HMDA data because the new definition of higher-priced
loan uses a survey-based estimate of market mortgage rates as the
benchmark for reporting.
The purpose of HMDA is to provide to public officials, and to the
public, information to enable them to determine whether lending
institutions are fulfilling their obligations to serve the housing
needs of their communities. The purpose of the law is also to assist
public officials in determining the distribution of public sector
investments in a manner designed to improve the private investment
environment. 12 U.S.C. 2801(b). HMDA data also assist in identifying
possibly discriminatory lending patterns and in enforcing
antidiscrimination statutes. HMDA authorizes the Board to prescribe
regulations to carry out the purposes of the statute. 12 U.S.C.
2804(a).
The act expressly states that the Board's regulations may contain
``such classifications, differentiations, or other provisions * * * as
in the judgment of the Board are necessary and proper to effectuate the
purposes of [HMDA], and prevent circumvention or evasion thereof, or to
facilitate compliance therewith.'' 12 U.S.C. 2804(a). The Board
believes that the amendments to Regulation C discussed above are within
Congress's broad grant of authority to the Board to adopt provisions
that carry out the purposes of the statute.
B. Summary of Issues Raised by Comments in Response to the Initial
Regulatory Flexibility Analysis
The Board did not receive any comments contending that the proposed
rule would have a significant impact on various businesses or on its
initial regulatory flexibility analysis.
C. Description and Estimate of Small Entities To Which the Proposed
Rule Would Apply
The final rule will apply to all institutions that are required to
report under HMDA. The Board does not have complete data on the asset
sizes of all HMDA reporting institutions. Through data from Reports of
Condition and Income (``Call Reports'') of depository institutions and
certain subsidiaries of banks and bank holding companies, however, the
Board can determine numbers of small entities among those categories.
For the majority of HMDA respondents that are non-depository
institutions exact asset size information is not available. The Board
has somewhat reliable estimates based in large measure on self-
reporting from approximately five percent of the non-depository
respondents. Based on the best information available for each category
of respondent, the Board makes the following estimate of small entities
that will be affected by this final rule: Of all HMDA respondents in
2008 (for 2007 activities), which number approximately 8,625,
approximately 4,520 had total domestic assets of $165 million or less
and thus would be considered small entities for purposes of the
Regulatory Flexibility Act. The Board believes that the economic impact
on these small entities is not significant.
D. Reporting, Recordkeeping, and Other Compliance Requirements
HMDA reporting is a routine activity for all HMDA respondents,
large and small. The changes implemented by this final rule impose a
new requirement on HMDA respondents to obtain a publicly available
index (average prime offer rates derived from PMMS data) and use it to
apply a reporting threshold test to their loan originations. That
requirement, however, replaces an existing requirement that is very
similar but for the index used. The burden of complying with the new
requirement should not differ significantly from the existing burden of
complying with the requirement it replaces; that existing burden is
addressed in the PRA discussion in part VI above. As is also discussed
in the PRA analysis, the Board expects the one-time burden of
converting HMDA respondents' systems to employ the new index to average
16 hours (two business days).
E. Steps Taken To Minimize the Economic Impact on Small Entities
The Board solicited comment on any significant alternatives that
may provide additional ways to reduce regulatory burden associated with
the proposed rule. No comments were received.
List of Subjects in 12 CFR Part 203
Banks, Banking, Federal Reserve System, Mortgages, Reporting and
recordkeeping requirements.
Authority and Issuance
0
For the reasons set forth in the preamble, the Board amends 12 CFR part
203 as follows:
PART 203--HOME MORTGAGE DISCLOSURE (REGULATION C)
0
1. The authority citation for part 203 continues to read as follows:
Authority: 12 U.S.C. 2801-2810.
0
2. Section 203.4 is amended by revising paragraphs (a)(12) and (a)(13)
to read as follows:
Sec. 203.4 Compilation of loan data.
(a) * * *
(12)(i) For originated loans subject to Regulation Z, 12 CFR part
226, the difference between the loan's annual percentage rate (APR) and
the average prime offer rate for a comparable transaction as of the
date the interest rate is set, if that difference is equal to or
greater than 1.5 percentage points for loans secured by a first lien on
a dwelling, or equal to or greater than 3.5 percentage points for loans
secured by a subordinate lien on a dwelling.
(ii) ``Average prime offer rate'' means 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. The Board publishes average prime offer rates for a
broad range of types of transactions in tables updated at least weekly,
as well as the methodology the Board uses to derive these rates.
(13) Whether the loan is subject to the Home Ownership and Equity
Protection Act of 1994, as implemented in Regulation Z (12 CFR 226.32).
* * * * *
0
3. In Appendix A to Part 203, under I. Instructions for Completion of
Loan/Application Register, paragraphs I.G.1.a., I.G.1.d., I.G.1.e., and
I.G.2. are revised to read as follows:
[[Page 63336]]
Appendix A to Part 203--Form and Instructions for Completion of HMDA
Loan/Application Register
* * * * *
I. Instructions for Completion of Loan/Application Register
* * * * *
G. Pricing-Related Data
1. Rate Spread
a. For a home-purchase loan, a refinancing, or a dwelling-
secured home improvement loan that you originated, report the spread
between the annual percentage rate (APR) and the average prime offer
rate for a comparable transaction if the spread is equal to or
greater than 1.5 percentage points for first-lien loans or 3.5
percentage points for subordinate-lien loans. To determine whether
the rate spread meets this threshold, use the average prime offer
rate in effect for the type of transaction as of the date the
interest rate was set, and use the APR for the loan, as calculated
and disclosed to the consumer under Sec. 226.6 or 226.18, as
applicable, of Regulation Z (12 CFR part 226). Current and historic
average prime offer rates are set forth in the tables published on
the FFIEC's Web site (http://www.ffiec.gov/hmda) entitled ``Average
Prime Offer Rates--Fixed'' and ``Average Prime Offer Rates--
Adjustable.'' Use the most recently available average prime offer
rate. ``Most recently available'' means the average prime offer rate
set forth in the applicable table with the most recent effective
date as of the date the interest rate was set. Do not use an average
prime offer rate before its effective date.
d. Enter the rate spread to two decimal places, and use a
leading zero. For example, enter 03.29. If the difference between
the APR and the average prime offer rate is a figure with more than
two decimal places, round the figure or truncate the digits beyond
two decimal places.
e. If the difference between the APR and the average prime offer
rate is less than 1.5 percentage points for a first-lien loan and
less than 3.5 percentage points for a subordinate-lien loan, enter
``NA.''
2. Date the interest rate was set. The relevant date to use to
determine the average prime offer rate for a comparable transaction
is the date on which the loan's interest rate was set by the
financial institution for the final time before closing. 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. If no lock-in agreement is executed, then the
relevant date is the date on which the institution sets the rate for
the final time before closing.
* * * * *
0
4. In Supplement I to Part 203, under Section 203.4--Compilation of
Loan Data, 4(a) Data Format and Itemization, Paragraph 4(a)(12) Rate
spread information, paragraph 4(a)(12)-1 is removed, and new heading
Paragraph 4(a)(12)(ii) and new paragraphs 4(a)(12)(ii)-1, 4(a)(12)(ii)-
2, and 4(a)(12)(ii)-3 are added to read as follows:
Supplement I to Part 203--Staff Commentary
* * * * *
Section 203.4--Compilation of Loan Data
4(a) Data Format and Itemization
* * * * *
Paragraph 4(a)(12) Rate spread information.
Paragraph 4(a)(12)(ii).
1. Average prime offer rate. 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. Other pricing terms include commonly
used indices, margins, and initial fixed-rate periods for variable-
rate transactions. Relevant pricing characteristics include a
consumer's credit history and transaction characteristics such as
the loan-to-value ratio, owner-occupant status, and purpose of the
transaction. To obtain average prime offer rates, the Board uses a
survey of lenders that both meets the criteria of Sec.
203.4(a)(12)(ii) and 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[supreg].
2. Comparable transaction. The rate spread reporting requirement
applies to a reportable loan with an annual percentage rate that
exceeds by the specified margin (or more) the average prime offer
rate for a comparable transaction as of the date the interest rate
is set. The tables of average prime offer rates published by the
Board (see comment 4(a)(12)(ii)-3) indicate how to identify the
comparable transaction.
3. Board tables. The Board publishes on the FFIEC's Web site
(http://www.ffiec.gov/hmda), in table form, average prime offer
rates for a wide variety of transaction types. The Board calculates
an annual percentage rate, consistent with Regulation Z (see 12 CFR
226.22 and part 226, appendix J), for each transaction type for
which pricing terms are available from the survey described in
comment 4(a)(12)(ii)-1. The Board estimates annual percentage rates
for other types of transactions for which direct survey data are not
available based on the loan pricing terms available in the survey
and other information. The Board publishes on the FFIEC's Web site
the methodology it uses to arrive at these estimates.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, October 20, 2008.
Jennifer J. Johnson,
Secretary of the Board.
Attachment I--Methodology for Determining Average Prime Offer Rates
The calculation of average prime offer rates is based on the
Freddie Mac Primary Mortgage Market Survey[supreg] (PMMS). The survey
collects data for a hypothetical, ``best quality,'' 80% loan-to-value,
first-lien loan for four mortgage products: (1) 30-year fixed-rate; (2)
15-year fixed-rate; (3) one-year variable-rate; and (4) five-year
variable-rate.\5\ Each of the variable-rate products adjusts to an
index based on the one-year Treasury rate plus a margin and adjusts
annually after the initial, fixed-rate period. This Methodology first
describes all the steps necessary to calculate average prime offer
rates and then provides a numerical example illustrating each step with
the data from the week of May 19, 2008.
---------------------------------------------------------------------------
\5\ The ``30-year'' and ``15-year'' fixed-rate product
designations refer to those products' terms to maturity. The ``one-
year'' and ``five-year'' variable-rate product designations, on the
other hand, refer to those products' initial, fixed-rate periods.
All variable-rate products discussed in this Methodology have 30-
year terms to maturity.
---------------------------------------------------------------------------
The PMMS collects nationwide average offer prices during the Monday
through Wednesday period each week and publicly releases the averages
on Thursday. For each loan type the average commitment loan rate and
total fees and points (``points'') are reported, with the points
expressed as percentages of the initial loan balance. For the fixed-
rate products, the commitment rate is the contract rate on the loan;
for the variable-rate products it is the initial contract rate. For the
variable-rate products, the average margin is also reported.
The PMMS data are used to compute an annual percentage rate (APR)
for the 30- and 15-year fixed-rate products. For the two variable-rate
products, an estimate of the fully-indexed rate (the sum of the index
and margin) is calculated as the margin (collected in the survey) plus
the current one-year Treasury rate, which is estimated as the average
of the close-of-business, one-year Treasury rates for Monday, Tuesday,
and Wednesday of the survey week. If data are available for fewer than
three days, only yields for the available days are used for the
average. Survey data on the initial interest rate and points, and the
estimated fully indexed rate, are used to compute a composite APR for
the one- and five-year variable-rate mortgage products. See Regulation
Z official staff commentary, 12 CFR part
[[Page 63337]]
226, Supp. I, comment 17(c)(1)-10 (creditors to compute a composite APR
where initial rate on variable-rate transaction not determined by
reference to index and margin).
In computing the APR for all four PMMS products, a fully amortizing
loan is assumed, with monthly compounding. A two-percentage-point cap
on the annual interest rate adjustments is assumed for the variable-
rate products. For all four products, the APR is calculated using the
actuarial method, pursuant to appendix J to Regulation Z. A payment
schedule is used that assumes equal monthly payments (even if this
entails fractions of cents), assumes each payment due date to be the
1st of the month regardless of the calendar day on which it falls,
treats all months as having 30 days, and ignores the occurrence of leap
years. See 12 CFR 226.17(c)(3). The APR calculation also assumes no
irregular first period or per diem interest collected.
The PMMS data do not cover fixed-rate loans with terms to maturity
of other than 15 or 30 years and do not cover variable-rate mortgages
with initial, fixed-rate periods of other than one or five years. The
Board uses interpolation techniques to estimate APRs for ten additional
products (two-, three-, seven-, and ten-year variable-rate loans and
one-, two-, three-, five-, seven-, and ten-year fixed-rate loans) to
use along with the four products directly surveyed in the PMMS.
The Treasury Department makes available yields on its securities
with terms to maturity of, among others, one, two, three, five, seven,
and ten years (see http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml). The Board uses these data to
estimate APRs for two-, three-, seven-, and ten-year variable-rate
mortgages. These additional variable-rate products are assumed to have
the same terms and features as the one- and five-year variable-rate
products surveyed in the PMMS other than the length of the initial,
fixed-rate period.
The margin and points for the two- and three-year variable-rate
products are estimated as weighted averages of the margins and points
of the one-year and five-year variable-rate products reported in the
PMMS. For the two-year variable-rate loan the weights are \3/4\ for the
one-year variable-rate and \1/4\ for the five-year variable-rate. For
the three-year variable-rate product, the weights are \1/2\ each for
the one-year and the five-year variable rate. For the seven- and ten-
year variable-rate products, because they fall outside of the range
between the one- and five-year PMMS variable-rate products, the margin
and points of the five-year variable-rate product reported in the PMMS
are used instead of calculating a weighted average.
The initial interest rate for each of the interpolated variable-
rate products is estimated by a two-step process. First, ``Treasury
spreads'' are computed for the two- and three-year variable-rate loans
as the weighted averages of the spreads between the initial interest
rates on the one- and five-year PMMS variable-rate products and the
one- and five-year Treasury yields, respectively. The weights used are
the same as those used in the calculation of margins and points. For
seven- and ten-year variable-rate loans, because they fall outside of
the range between the one- and five-year PMMS variable-rate products,
the spread between the initial interest rate on the five-year PMMS
variable-rate product and the five-year Treasury yield is used as the
Treasury spread instead of calculating a weighted average. The second
step is to add the appropriate Treasury spread to the Treasury yield
for the appropriate initial, fixed-rate period. All Treasury yields
used in this two-step process are the Monday-Wednesday close-of-
business averages, as described above. Thus, for example, for the two-
year variable-rate product the estimated, two-year Treasury spread is
added to the average two-year Treasury rate, and for the ten-year
variable-rate product the five-year Treasury spread is added to the
average ten-year Treasury rate.
Thus estimated, the initial rates, margins, and points are used to
calculate a fully-indexed rate and ultimately an APR for the two-,
three-, seven- and ten-year variable-rate products. To estimate APRs
for one-, two-, three-, five-, seven-, and ten-year fixed-rate loans,
respectively, the Board uses the initial interest rates and points, but
not the fully-indexed rates, of the one-, two-, three-, five-, seven-,
and ten-year variable-rate loan products calculated above.
For any loan for which an APR of the same term to maturity or
initial, fixed-rate period, as applicable, (collectively, for purposes
of this paragraph, ``term'') is not included among the 14 products
derived or estimated from the PMMS data by the calculations above, the
comparable transaction is identified by the following assignment rules:
For a loan with a shorter term than the shortest applicable term for
which an APR is derived or estimated above, the APR of the shortest
term is used. For a loan with a longer term than the longest applicable
term for which an APR is derived or estimated above, the APR of the
longest term is used. For all other loans, the APR of the applicable
term closest to the loan's term is used; if the loan is exactly halfway
between two terms, the shorter of the two is used. For example: For a
loan with a term of eight years, the applicable (fixed-rate or
variable-rate) seven-year APR is used; with a term of six months, the
applicable one-year APR is used; with a term of nine years, the
applicable ten-year APR is used; with a term of 11 years, the
applicable ten-year APR is used; and with a term of four years, the
applicable three-year APR is used. For a fixed-rate loan with a term of
16 years, the 15-year fixed-rate APR is used; and with a term of 35
years, the 30-year fixed-rate APR is used.
The four APRs derived directly from PMMS product data, the ten
additional APRs estimated from PMMS data in the manner described above,
and the APRs determined by the foregoing assignment rules are the
average prime offer rates for their respective comparable transactions.
The PMMS data needed for the above calculations generally are available
on the Freddie Mac Web site (http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp) on Thursday of each week. APRs representing
average prime offer rates for the 14 products derived or estimated as
above are posted in tables on the FFIEC Web site the following day.
Those average prime offer rates are effective beginning the following
Monday and until the next posting takes effect.
Numerical Example
The week of May 19 through 25, 2008 is used to illustrate the
average prime offer rate calculation Methodology. On Thursday May 15,
Freddie Mac released the following PMMS information reflecting national
mortgage rate averages for the three day period May 12 through May 14
(each variable is expressed in percentage points):
30-year fixed-rate:
Contract rate--6.01
Fees & Points--0.6
15-year fixed-rate:
Contract rate--5.60
Fees & Points--0.5
Five-year variable-rate:
Initial rate--5.57
Fees & Points--0.6
Margin--2.75
One-year variable-rate:
Initial rate--5.18
Fees & Points--0.7
Margin--2.75
The Freddie Mac survey contract rate and points for the 30-year and
15-year
[[Page 63338]]
fixed-rate mortgages are used to compute APRs for these two products:
30-year fixed-rate--6.07
15-year fixed-rate--5.68
As a preliminary step in calculating APRs for the one-year and
five-year variable-rate products, average close-of-business Treasury
yields for the three days in which the survey was conducted are
calculated (the three yields summed before dividing by three are the
close-of-business yields reported for May 12th, 13th, and 14th):
One-year Treasury--(2.01+2.08+2.11)/3=2.07
Two-year Treasury--(2.30+2.57+2.53)/3=2.43
Three-year Treasury--(2.54+2.70+2.78)/3=2.67
Five-year Treasury--(3.00+3.17+3.22)/3=3.13
Seven-year Treasury--(3.34+3.49+3.50)/3=3.44
Ten-year Treasury--(3.78+3.90+3.92)/3=3.87
The fully-indexed rate for the one-year variable-rate mortgage is
calculated as the one-year Treasury yield plus the margin:
2.07+2.75=4.82 Because both variable-rate products in the PMMS data use
the same margin, the fully-indexed rate for the five-year variable-rate
mortgage is the same number: 2.07+2.75=4.82 (since each adjusts to the
1-year treasury).
The initial rate, points, and fully-indexed rate are used to
compute APRs for the one-year and five-year variable-rate products:
One-year variable-rate--4.91
Five-year variable-rate--5.16
Data for the interpolated two-year and three-year variable-rate
mortgages are calculated as weighted averages of the figures for the
one- and five-year variable-rates, which are used in conjunction with
the yields on the two- and three-year Treasuries as follows:
Two-year variable-rate:
Initial rate--[3x(5.18-2.07)+1x(5.57-3.13)]/4+2.43=5.37
Fees & Points--[3x.7+1x.6]/4=.7
Margin--[3x2.75+1x2.75]/4=2.75
Fully-indexed rate--2.07+2.75=4.82
Three-year variable-rate:
Initial rate--[2x(5.18-2.07)+2x(5.57-3.13)]/4+2.67=5.45
Fees & Points--[2x.7+2x.6]/4=.7
Margin--[2x2.75+2x2.75]/4=2.75
Fully-indexed rate--2.07+2.75=4.82
The foregoing initial rates, points, margins, and fully-indexed
rates are used to calculate APRs for the two- and three-year variable-
rate products:
Two-year variable-rate--4.97
Three-year variable-rate--5.03
Data for the seven-year and ten-year variable-rate products are
estimated using the survey data for the five-year variable-rate product
and yields on the seven- and ten-year Treasuries:
Seven-year variable-rate:
Initial rate--(5.57-3.13)+3.44=5.88
Fees & Points--=.6
Margin--=2.75
Fully-indexed rate--2.07+2.75=4.82
Ten-year variable-rate:
Initial rate--(5.57-3.13)+3.87=6.31
Fees & Points--=.6
Margin--=2.75
Fully-indexed rate--2.07+2.75=4.82
The foregoing initial rates, points, margins, and fully-indexed
rates are used to calculate APRs for the seven- and ten-year variable-
rate products:
Seven-year variable-rate--5.40
Ten-year variable-rate--5.85
The initial rate and points of the variable-rate mortgages
calculated above are used to estimate APRs for fixed-rate products with
terms to maturity of ten years or less:
One-year fixed:
Initial rate--5.18
Fees & Points--.7
APR--6.49
Two-year fixed:
Initial rate--5.37
Fees & Points--.7
APR--6.06
Three-year fixed:
Initial rate--5.45
Fees & Points--.7
APR--5.92
Five-year fixed:
Initial rate--5.57
Fees & Points--.6
APR--5.82
Seven-year fixed:
Initial rate--5.88
Fees & Points--.6
APR--6.06
Ten-year fixed:
Initial rate--6.31
Fees & Points--.6
APR--6.44
[FR Doc. E8-25320 Filed 10-23-08; 8:45 am]
BILLING CODE 6210-01-P