The rate spread is a familiar data point that many institutions are used to reporting, however, the new HMDA regulation that will take effect in 2018 will bring a big change. The old regulation did not require an institution to report the rate spread if the annual percentage rate (APR) did not exceed the average prime offer rate (APOR) by a certain percentage. Under the new HMDA regulation, the rate spread is now required to be reported in most cases. In order to determine the rate spread, you must take the difference between the loan’s APR and a comparable transaction’s APOR.
The rate spread can be determined manually or by using the FFIEC’s Rate Spread Calculator which can be found here: https://www.ffiec.gov/ratespread. The FFIEC website also provides the Average Prime Offer Rates tables and a batch rate spread calculator for multiple loan calculations.
If the institution decides to manually find the APOR, they must first determine the comparable transaction. In order to do this, the institution must look at the loan’s amortization type and loan term. For fixed-rate loans the transaction’s maturity (or the period until the last payment will be due) is used. If the loan is an open-end line of credit but has no definitive length of time, then an institution may use a 30-year fixed-rate loan as the comparable transaction. For variable-rate loans, the initial fixed-rate period is used. When the maturity term is not in whole years, the term should be rounded to the nearest whole year. For example, if the loan matures at 10 years and 3 months, then the term for a comparable transaction will be 10 years.
The next step in determining the APOR is to establish the rate set date. This should be the date that the institution set the loan’s interest rate for the final time before closing. For instance, if the rate was set according to a lock agreement, then the date of that agreement is used. The last step in determining the APOR is to determine the most recent APOR as of the rate set date. These rates can be found on the applicable tables on the FFIEC’s website.
When entering the rate spread on your HMDA LAR, you should round it to at least three decimal places. If the APR exceeds the APOR, then a positive number should be reported. However, if the APR is less than the APOR, a negative number should be reported as the rate spread.
There are some circumstances in which the rate spread is not reported. An institution should report this data point as being “Not Applicable” if the loan: does not end in origination, is a purchased loan, an assumption, a reverse mortgage, or if it is not subject to Regulation Z. The only instance where the rate spread should be reported for a loan that was not originated is when the application was approved but not accepted. In this case, the difference between the APR of the loan that would have resulted if it was accepted and a comparable transaction’s APOR as of the date that the interest rate was set is reported on the HMDA LAR.
For more information on HMDA regulations, 2018 data point changes or our HMDA compliance services, please call Rhonda Wannemuehler or Betsy Reynolds at 855-734-7655.