HMDA and Reporting the Rate Spread for a Variable Rate Loan

Issue/Inquiry

The Bank is trying to determine whether the rate spread is reported on the HMDA LAR for a one year home improvement loan when the interest rate is adjusted daily based on Prime. There is no initial fixed interest rate period since the rate adjusts whenever Prime changes.

Response Summary

A financial institution reports the difference between the annual percentage rate of the covered loan and the average prime offer rate of a comparable transaction as of the date the interest rate is set. For variable-rate loans, the term used to identify the comparable transaction is the initial fixed-rate period (i.e., the period until the first scheduled rate adjustment). When the term varies according to an index, with no introductory fixed rate period, a transaction term of one year is to be used.

Response Detail

Under the new HMDA-reporting rules, which went into effect on January 1, 2018, a financial institution gathers data on the difference between the covered loan’s annual percentage rate and the average prime offer rate for a comparable transaction as of the date the interest rate is set. 12 CFR §1003.4(a)(12)(i).

The rate spread calculation is defined by reference to a comparable transaction, which is determined according to the covered loan’s amortization type (i.e., fixed or variable-rate) and loan term. Official Interpretations, 1003.4(a)(12) – 4.i.

For variable-rate covered loans, the term used to identify the comparable transaction is the initial, fixed-rate period (i.e., the period until the first scheduled rate adjustment). For example, five years is the relevant term for a variable-rate transaction with a five-year, fixed-rate introductory period that is amortized over 30 years. Financial institutions may refer to the table on the FFIEC website titled “Average Prime Offer Rates-Variable” when identifying a comparable variable-rate transaction. Official Interpretations, 1003.4(a)(12) – 4.ii.

When the initial fixed-rate period for a variable-rate loan is not in whole years, the financial institution uses the number of whole years closest to the actual loan term or, if the actual loan term is exactly halfway between two whole years, by using the shorter loan term.

When the term is shorter than six months, as the official commentary characterizes variable-rate covered loans with no initial, fixed rate periods, the financial institution rounds the term to one year. For example, if an open-end covered loan has a rate that varies according to an index plus a margin, with no introductory, fixed-rate period, the transaction term is one year. Official Interpretations, 1003.4(a)(12) – 4.iii.

In this case, the Bank will use one year for the term, since the loan has a rate that varies according to Prime and has no initial, fixed-rate period.

This entry was posted on Monday, February 12th, 2018 at 6:00 am.