Posted by Steve Van Beek
Section 226.35 creates a new category of mortage loans - "Higher-Priced Mortgage Loans" - which come with their own requirements and restrictions. Keep in mind that although this category was created by the HOEPA amendments to Reg Z, it is distinct and separate from the traditional HOEPA loans (a.k.a. "Section 32 mortgages" or "high-rate/high-fee loans").
A mortgage loan is considered a "higher-priced mortgage loan" if the loan's APR exceeds the average prime offer rate for a comparable transaction:
- By 1.5 or more precentage points for loans secured by a first lien on a dwelling, or
- By 3.5 or more precentage points for loans secured by a subordinate lien on a dwelling.
The "average prime offer rate" will be determined by the Federal Reserve Board and posted at least weekly on the FFIEC website. Because this rate will change on a weekly basis, credit unions will need to track their APR rates against this continuously moving "average prime offer rate" benchmark.
When do you measure the rate against the "average prime offer rate"? The official staff commentary has the answer:
"3. Rate set. A transaction’s annual percentage rate is compared to the average prime offer rate as of the date the transaction’s interest rate is set (or ‘‘locked’’) before consummation. Sometimes a creditor sets the interest rate initially and then re-sets it at a different level before consummation. The creditor should use the last date the interest rate is set before consummation." Comment 3 - Official Staff Commentary to 12 C.F.R. 226.35(a).
To see the latest "average prime offer rates" tables to gauge how your mortgage loan rates stack up, go to the FFIEC's rate spread calculator and review the tables for the maturity terms your credit union offers. For this week, the average prime offer rate for a 30-year fixed mortgage was 5.18%. Thus, if the new amendments were effective today, a first lien mortgage loan with a rate of 6.68% or higher would be a "higher-priced mortgage loan."
Remember, this benchmark will be a moving target that the credit union will need to monitor their loans against to ensure they are in compliance.
Exceptions. Temporary or "bridge" loans with a term of twelve (12) months or less, reverse-mortgage loans, and HELOCs are not included in the definition of "higher-priced mortgage loans" regardless of their APR.
Tomorrow we will cover the additional requirements and restrictions on "higher-priced mortgage loans" - including the escrow requirement for higher-priced mortgage loans secured by a first lien.