Home Mortgage Disclosure, 44189-44197 [E8-16501]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 73, Number 147 (Wednesday, July 30, 2008)]
[Proposed Rules]
[Pages 44189-44197]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-16501]


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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: Proposed rule; proposed staff interpretation.

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SUMMARY: The Board is proposing to amend Regulation C (Home Mortgage 
Disclosure) to revise the rules for reporting price information on 
higher-priced loans. The rules would be conformed to the definition of 
``higher-priced mortgage loan'' adopted by the Board under Regulation Z 
(Truth in Lending) contemporaneously with this proposal. Regulation C 
currently requires lenders to report the spread between the annual 
percentage rate (APR) on a loan and the yield on Treasury securities of 
comparable maturity if the spread meets or exceeds 3.0 percentage 
points for a first-lien loan (or 5.0 percentage points for a 
subordinate-lien loan). Under the proposal, a lender would report the 
spread between the loan's APR and a survey-based estimate of rates 
currently offered on prime mortgage loans of a comparable type if the 
spread meets or exceeds 1.5 percentage points for a first-lien loan (or 
3.5 percentage points for a subordinate-lien loan).

DATES: Comments must be received by August 29, 2008.

ADDRESSES: You may submit comments, identified by Docket No. R-1321, by 
any of the following methods:
     Agency Web Site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.

    All public comments are available from the Board's Web site at: 
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be

[[Page 44190]]

edited to remove any identifying or contact information. Public 
comments may also be viewed electronically or in paper in Room MP-500 
of the Board's Martin Building (20th and C Streets, NW.) between 9 a.m. 
and 5 p.m. on weekdays.

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) 
452-3667 or (202) 452-2412. 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) 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 loan pricing (rate spread).\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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    HMDA and Regulation C were adopted in 1975, and have been amended 
numerous times over the years. The loan price reporting requirement was 
added in the most recent amendments and took effect beginning with the 
collection of data for calendar year 2004. (67 FR 7222, February 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 3.0 percentage points or more for a first-lien loan, or 5.0 
percentage points or more for a subordinate-lien loan. If the rate 
spread for a loan is less than the 3.0 or 5.0 percentage point 
threshold, it is not reported. The Treasury yield used is as of the 
15th day of a 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 Proposal

    The Board is proposing a method for determining when price 
information is reported that is similar in concept to Regulation C's 
current method but different in the particulars. The proposed rule, 
like the current rule, would set a threshold above a market rate to 
trigger reporting. But the market rate the Board is proposing is 
different, and therefore so is the threshold. Instead of yields on 
Treasury securities of comparable maturity, the proposed rule would use 
a survey-based estimate of market rates for the lowest-risk prime 
mortgages, referred to as the ``average prime offer rate,'' for 
comparable types of transactions.
    The survey the Board would rely on for the foreseeable future is 
the Primary Mortgage Market Survey[supreg] (PMMS) conducted by Freddie 
Mac. The Board would conduct its own survey if it became appropriate or 
necessary to do so. The reporting threshold would be set at 1.5 
percentage points above the average prime offer rate for first-lien 
loans, and 3.5 points for subordinate-lien loans. The lender would 
report the difference between the transaction's APR and the average 
prime offer rate on a comparable type of transaction if the difference 
met or exceeded the threshold.
    The proposed amendments are intended to 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 proposed amendments will also provide better and more 
useful pricing data on higher-priced loans reported under Regulation C.

III. Reasons for Improving HMDA Rate Spread Reporting

    Since the Board adopted Regulation C's reporting benchmark of 
yields on Treasury securities of comparable maturity, HMDA reporters 
and others have on various occasions identified shortcomings of this 
benchmark. Commenters to the January 2008 proposal under Regulation Z 
(73 FR 1672, January 9, 2008), under which the Board proposed to use 
Treasury yields as the benchmark to identify higher-priced loans 
warranting stricter regulations, again identified these shortcomings. 
Many of these commenters urged the Board to use a benchmark that more 
closely tracks mortgage rates. They also urged the Board to use the 
same test for these two purposes under Regulations C and Z, 
respectively. The Board considered these comments, conducted its own 
analysis, and concluded that both regulations should rely on a 
benchmark index that more closely tracks mortgage rates. Accordingly, 
this proposal would implement essentially the same rule the Board is 
adopting under Regulation Z.

A. Drawbacks of Using Treasury Security Yields

    There are significant advantages to using Treasury yields to set 
the threshold for reporting price information. 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, 
such as HOEPA, for benchmarking purposes.
    As recent events have highlighted, however, 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 the short term and in 
the long term. Moreover, the comparable Treasury security for a given 
mortgage loan is quite difficult to determine accurately.
    The Treasury-mortgage spread can change for at least three 
different

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reasons. First, credit risk may change on mortgages, even for the 
highest-quality borrowers. For example, credit risk increases when 
house prices fall. 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.
    Changes in the Treasury-mortgage spread can undermine key 
objectives of the regulation. These changes 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. Moreover, lenders' uncertainty as to when such 
changes will occur can cause them to set an internal threshold below 
the regulatory threshold. This may reduce credit availability directly 
(if a lender's policy is not to make higher-priced loans, to avoid 
having to report loan pricing for them) or indirectly, by increasing 
regulatory burden. The recent volatility might lead lenders to set 
relatively conservative cushions.
    Adverse consequences of volatility in the spread between mortgages 
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 proposing 
to use a benchmark index that more closely follows mortgage market 
rates, which would make any changes in the spread between mortgage 
rates and Treasuries largely academic.
    The second major disadvantage of using Treasury yields to set the 
threshold is that the comparable Treasury security for a given mortgage 
loan is quite difficult to determine accurately. Regulation C 
determines the comparable Treasury security on the basis of maturity: a 
loan is matched to a Treasury 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 does not, however, 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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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 avoid 
covering prime mortgages. The same purpose underlies the definition of 
``higher-priced mortgage loan'' the Board has just adopted under 
Regulation Z. For the reasons discussed in the Regulation Z final rule, 
the Board believes the definition under Regulation Z, if applied to 
Regulation C, would better achieve this purpose and ensure more 
consistent and more useful data. Moreover, using the same definition in 
both Regulation Z and Regulation C will relieve compliance burdens.

IV. The Board's Proposal

A. Rates From the Prime Mortgage Market

    To address the principal drawbacks of Treasury security yields, 
discussed above, the Board is proposing a rule that relies instead on a 
rate that more closely tracks rates in the prime mortgage market. 
Proposed Sec.  203.4(a)(12)(ii) would define an ``average prime offer 
rate'' as an annual percentage rate 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 annual percentage 
rate to this average offered annual percentage rate, rather than to an 
average offered contract interest rate, should make reporting more 
accurate and consistent. If a loan's APR exceeds the average prime 
offer rate for a comparable transaction by 1.5 or more percentage 
points for a first-lien loan, or 3.5 or more percentage points for a 
subordinate-lien loan, the creditor would report the difference. (The 
basis for selecting these thresholds is explained further in part IV.B. 
below.) The lender would use the most recently available average prime 
offer rate as of the date on which the lender sets the rate for the 
final time before consummation.
    To facilitate compliance, the proposed rule and commentary would 
provide that the Board will derive average prime offer rates from 
survey data according to a methodology it will make publicly available, 
and publish these rates in a table on the Internet on at least a weekly 
basis. This table would indicate how to identify a comparable 
transaction.
    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.'' For the two types of 
ARMs, PMMS pricing data 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 (if it differs from the sum of the index 
and margin). These data are updated every week and are published on 
Freddie Mac's Web site (see https://www.freddiemac.com/dlink/html/PMMS/
display/PMMSOutputYr.jsp).
    The Freddie Mac PMMS is the most viable option for obtaining 
average prime offer rates. This is the only publicly available data 
source that has rates for more than one kind of fixed-rate mortgage 
(the 15-year and the 30-year) and more than one kind of variable-rate 
mortgage (the 1-year ARM and the 5/1-year ARM). Having rates on at 
least two fixed-rate products and at least two variable-rate products 
supplies a firmer basis for estimating rates for other fixed-rate and 
variable-rate products (such as a 20-year fixed or a 3/1 ARM).
    Other publicly available surveys the Board considered are less 
suitable for the purposes of this proposal. Only one ARM rate is 
collected by the Mortgage Bankers Association's Weekly Mortgage 
Applications Survey and the Federal Housing Finance Board's Monthly 
Survey of Interest Rates and Terms on Conventional Single-Family Non-
Farm Mortgage Loans. Moreover, the FHFB Survey has a substantial lag 
because it is monthly and reports rates on closed loans. The Board also 
evaluated two non-survey options involving Fannie

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Mae and Freddie Mac. One is the Required Net Yield, the prices these 
institutions will pay to purchase loans directly. The other is the 
yield on mortgage-backed securities issued by Fannie Mae and Freddie 
Mac. With either option, data for ARM yields would be difficult to 
obtain.
    These other data sources, however, provide useful benchmarks to 
evaluate the accuracy of the PMMS. The PMMS has closely tracked these 
other indices, according to a Board staff analysis. The Board would 
continue to use them periodically to help it determine whether the PMMS 
remains an appropriate source of data for average prime offer rates. If 
the PMMS ceased to be available, or if circumstances arose that 
rendered it unsuitable for this rule, the Board would consider other 
alternatives including conducting its own survey.
    The Board would use the pricing terms from the PMMS, such as 
interest rate and points, to calculate an annual percentage rate 
(consistent with Regulation Z, 12 CFR 226.22) for each of the four 
types of transactions that the PMMS reports. These annual percentage 
rates would be the average prime offer rates for transactions of those 
types. The Board would derive annual percentage rates for other types 
of transactions from the loan pricing terms available in the survey. 
The method of derivation the Board would use is being published as part 
of this proposal (see Attachment I to this Federal Register notice). 
When finalized, the method would be published on the Internet along 
with the table of annual percentage rates.

B. Threshold for Rate Spread Reporting

    The Board is proposing a threshold 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. These 
thresholds are the same as adopted under Regulation Z's definition of 
``higher-priced mortgage loan.''
    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 market and a portion of the alt-A market.\3\ Based also on 
available data, the Board believes that the thresholds it is proposing 
would cover all, or virtually 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.\4\ 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\ The percentage of the first-lien mortgage market on which 
Regulation C has required rate spread reporting using a threshold of 
three percentage points has been greater than the percentage of the 
total market originations that one industry source has estimated to 
be subprime (25 percent vs. 20 percent in 2005; 28 percent vs. 20 
percent in 2006). For industry estimates see Inside Mortgage Finance 
Publications, Inc., The 2007 Mortgage Market Statistical Annual vol. 
1, at 4. Regulation C's coverage of higher-priced loans is not 
thought, however, to have reached the prime market in those years. 
Rather, in both 2005 and 2006 it reached into the alt-A market, 
which the same source estimated to be 12 percent in 2005 and 13 
percent in 2006. In 2004, Regulation C captured a significantly 
smaller part of the market than an industry estimate of the subprime 
market (11 percent vs. 19 percent), but that year's HMDA data were 
somewhat anomalous because of a steep yield curve.
    \4\ 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 proposing 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 it does not appear that a 
suitable measure of this kind exists. Although data are very limited, 
the Board believes it is appropriate to apply the same difference of 
two percentage points to the thresholds above market mortgage rates. As 
noted in the Regulation Z final rule, with rare exceptions, commenters 
explicitly endorsed, or at least did not raise any objection to, this 
approach in connection with that rulemaking; the Board is proposing to 
maintain consistency between the two rules.
    The Board recognizes that there are limitations to making judgments 
about the future scope of this proposed rule based on past data. For 
example, once a final rule takes effect, the risk premiums for alt-A 
loans compared to the prime loans reported in the PMMS may be higher 
than the risk premiums for the period 2004-2007. In that case, coverage 
of alt-A loans would be higher than an estimate for that period would 
indicate.
    Another important example is prime ``jumbo'' loans, or loans 
extended to borrowers with low-risk mortgage pricing characteristics, 
but in amounts that exceed the threshold for loans eligible for 
purchase by Freddie Mac or Fannie Mae. The PMMS collects pricing data 
only on loans eligible for purchase by one of these entities 
(``conforming loans''). Prime jumbo loans have always had somewhat 
higher rates than prime conforming loans, but the spread has widened 
significantly and become much more volatile since August 2007. If this 
spread remains wider and more volatile when this proposal takes effect 
in final form, the rule would cover a significant share of transactions 
that would be 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.
    Credit risk and liquidity risk can vary by many factors, including 
geography, property type, and type of loan. This may suggest to some 
that different thresholds should be applied to different classes of 
transactions. This approach would make the regulation inordinately 
complicated and subject it to frequent revision, which would not be in 
the interest of creditors, investors, or consumers. Although the 
simpler approach the Board is proposing--just two thresholds, one for 
first-lien loans and another for subordinate-lien loans--has its 
disadvantages, the Board believes they would be outweighed by its 
benefits of simplicity and stability.

C. Timing of Determining the Reporting Threshold

    Regulation C currently determines the threshold as of the 15th of 
the month before the rate is locked. This proposal would determine the 
threshold for a transaction on a more current basis. The proposal would 
require a creditor to use the most recent average prime offer rate 
available as of the rate lock date. As the PMMS is updated weekly, the 
Board will also update average prime offer rates weekly. The Board 
anticipates that using a more current benchmark will

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improve reporting accuracy without increasing regulatory burden.

V. Effective Date

    Under the final rule published simultaneously with this proposal, 
the Regulation Z amendments concerning higher-priced mortgage loans 
take effect on October 1, 2009. The Board contemplates that any final 
amendments to Regulation C under this rulemaking would take effect for 
data collection beginning January 1, 2009. Switching rules for HMDA 
rate spread reporting in the middle of a calendar year would make the 
data more difficult to use and interpret. If the Board were to make it 
effective January 1, 2010, lenders would be required to report HMDA 
data in 2009 using the old (current) rule based on Treasury security 
yields while, in October through December of 2009, determining 
applicability of the Regulation Z higher-priced mortgage loan 
provisions using the new rule based on average prime offer rates. An 
effective date of January 1, 2009 would ensure that lenders would not 
need to maintain two separate systems for determining higher-priced 
mortgage loans during the final quarter of 2009.
    If a loan were consummated on or after January 1, 2009, the lender 
would be required to determine whether the loan is higher-priced (and, 
if so, report the rate spread) using the new rule, while if the loan 
were consummated before January 1, 2009 the lender would continue to 
use the old (current) rule. The Board recognizes that some loans that 
close in 2009 will have had their rates locked sometime in 2008 (or 
earlier). Thus, some loans that close in 2009 (and accordingly would be 
reported on a lending institution's HMDA report for calendar year 2009) 
would require a creditor to use pre-2009 average prime offer rates to 
determine their rate spreads. To address this issue, the Board would 
publish average prime offer rates on the Internet dating from the 
beginning of October 2008, which lenders could use for loans that are 
locked in on or after October 1, 2008 but originated in 2009. Lenders 
that locked in a rate prior to October 1, 2008 but originated the loan 
in 2009 (or later) would determine whether and how to report price 
information for such loans using the old (current) rule. To help data 
users identify these loans, the Board contemplates adding a notation to 
each such loan in the publicly available data report for 2009 (based on 
application date, as the closest available proxy for rate-lock date). 
The Board expects such loans to comprise a very small percentage (one 
percent or less) of the 2009 HMDA data, based on staff analysis of past 
years' data.

VI. Requests for Comment

    The Board requests comments 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) the method the Board proposes to use 
to derive average prime offer rates from the PMMS data, which is being 
published as Attachment I to this 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 effective date 
of these amendments; and (7) the costs and benefits of the proposal 
generally.

VII. 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 proposed rule under the authority delegated to the Board 
by Office of Management and Budget (OMB). The Board 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 that would be revised by 
this rulemaking 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 Board 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)).
    The current total annual burden to comply with the provisions of 
Regulation C is estimated to be 156,910 hours for 680 Board-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 Board 
would take, on average, 16 hours (two business days) to revise and 
update their systems to comply with the proposed threshold for rate 
spread reporting. This one-time revision would increase the burden by 
10,880 hours to 167,790.
    Comments are invited on: (1) Whether the proposed collection of 
information is necessary for the proper performance of the Board's 
functions; including whether the information has practical utility; (2) 
the accuracy of the Board's estimate of the burden of the proposed 
information collection, including the cost of compliance; (3) ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (4) ways to minimize the burden of information 
collection on respondents, including through the use of automated 
collection techniques or other forms of information technology. 
Comments on the collection of information should be sent to Michelle 
Shore, Federal Reserve Board Clearance Officer, Division of Research 
and Statistics, Mail Stop 151-A, Board of Governors of the Federal 
Reserve System, Washington, DC 20551,

[[Page 44194]]

with copies of such comments sent to the Office of Management and 
Budget, Paperwork Reduction Project (7100-0247), Washington, DC 20503.

VIII. Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
generally requires an agency to perform an assessment of the impact a 
rule is expected to have on small entities. However, under section 
605(b) of the RFA, 5 U.S.C. 605(b), the regulatory flexibility analysis 
otherwise required under section 604 of the RFA is not required if an 
agency certifies, along with a statement providing the factual basis 
for such certification, that the rule will not have a significant 
economic impact on a substantial number of small entities. Based on its 
analysis and for the reasons stated below, the Board believes that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. A final regulatory flexibility 
analysis will be conducted after consideration of comments received 
during the public comment period.

A. Statement of the Objectives of and Legal Basis for the Proposal

    The Board is proposing amendments to Regulation C to make the rules 
for reporting higher-priced loans in the annual Home Mortgage 
Disclosure Act (HMDA) data consistent with the definition of higher-
priced loan in the amendments to Regulation Z (Truth in Lending) that 
the Board is adopting in final form. 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. HMDA data also assist in identifying possibly 
discriminatory lending patterns and in enforcing antidiscrimination 
statutes. 12 U.S.C. 2801(b). 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. Small Entities Affected by the Proposal

    The proposed rule would 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 would be affected by this proposal: 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.

C. Other Federal Rules

    The Board believes no federal rules duplicate, overlap, or conflict 
with the proposed revisions to Regulation C. However, the Board 
solicits comment on this matter.

D. Significant Alternatives to the Proposed Revisions

    The Board solicits comment on any significant alternatives that may 
provide additional ways to reduce regulatory burden associated with 
this proposed rule.

IX. Solicitation of Comments Regarding the Use of ``Plain Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the 
Board to use ``plain language'' in all proposed and final rules 
published after January 1, 2000. The Board invites comments on whether 
the proposed rules are clearly stated and effectively organized, and 
how the Board might make the proposed text easier to understand.

List of Subjects in 12 CFR Part 203

    Banks, Banking, Federal Reserve System, Mortgages, Reporting and 
recordkeeping requirements.

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions to the text of Regulation C, Appendix A, and the Official 
Staff Commentary. New language is shown inside bold arrows, while 
language that would be deleted is set off in brackets.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 203 as follows:

PART 203--HOME MORTGAGE DISCLOSURE (REGULATION C)

    1. The authority citation for part 203 continues to read as 
follows:

    Authority: 12 U.S.C. 2801-2810.

    2. Section 203.4 is amended by revising paragraph (a)(12) to read 
as follows:


Sec.  203.4  Compilation of loan data.

    (a) * * *
    (12) [rtrif](i)[ltrif] For originated loans subject to Regulation 
Z, 12 CFR part 226, the difference between the loan's annual percentage 
rate (APR) and the [yield on Treasury securities having comparable 
periods of maturity] [rtrif]average prime offer rate for a comparable 
transaction as of the date the interest rate is set[ltrif], if that 
difference is equal to or greater than [3] [rtrif]1.5[ltrif] percentage 
points for loans secured by a first lien on a dwelling, or equal to or 
greater than [5] [rtrif]3.5[ltrif] percentage points for loans secured 
by a subordinate lien on a dwelling. [The lender shall use the yield on 
Treasury securities as of the 15th day of the preceding month if the 
rate is set between the 1st and the 14th day of the month and as of the 
15th day of the current month if the rate is set on or after the 15th 
day, as prescribed in appendix A to this part.]
    [rtrif](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

[[Page 44195]]

pricing characteristics. The Board publishes average prime offer rates 
for a broad range of types of mortgage in a table updated at least 
weekly as well as the methodology the Board uses to derive these 
rates.[ltrif]
* * * * *
    3. In appendix A to part 203, under I. Instructions for Completion 
of Loan/Application Register, paragraphs I.G.1. and I.G.2. are revised 
to read as follows:

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 [rtrif]average 
prime offer rate for a comparable transaction[ltrif] [applicable 
Treasury yield] if the spread is equal to or greater than 
[rtrif]1.5[ltrif] [3] percentage points for first-lien loans or 
[rtrif]3.5[ltrif] [5] percentage points for subordinate-lien loans. 
To determine whether the rate spread meets this threshold, use the 
[rtrif]average prime offer rate for the type of transaction, 
pursuant to Sec.  203.4(a)(12) and staff commentary thereunder, as 
of the date[ltrif] [Treasury yield for securities of a comparable 
period of maturity as of the 15th day of a given month, depending on 
when] 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 
of Regulation Z (12 CFR part 226). Use the [rtrif]most recently 
available average prime offer rate.[ltrif] [15th day of a given 
month for any loan on which the interest rate was set on or after 
that 15th day through the 14th day of the next month. (For example, 
if the rate is set on September 17, 2004, use the Treasury yield as 
of September 15, 2004; if the interest rate is set on September 3, 
2004, use the Treasury yield as of August 15, 2004). To determine 
the applicable Treasury-security yield, the financial institution 
must use] [rtrif]Current and historic average prime offer rates are 
set forth in[ltrif] the table published on the FFIEC's Web site 
(https://www.ffiec.gov/hmda) entitled [rtrif]``Average Prime Offer 
Rates.''[ltrif] [``Treasury Securities of Comparable Maturity under 
Regulation C.'']
* * * * *
    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 [rtrif]average prime offer rate[ltrif] [Treasury 
yield] 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 [rtrif]average 
prime offer rate[ltrif] [Treasury yield] is less than 
[rtrif]1.5[ltrif] [3] percentage points for a first-lien loan and 
less than [rtrif]3.5[ltrif] [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 [rtrif]average prime offer rate for a comparable 
transaction[ltrif] [Treasury yield] 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.
* * * * *

    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, new heading 
Paragraph 4(a)(12)(ii) is added, and new paragraphs 4(a)(12)(ii)-1, -2, 
and -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.
    [1] Treasury securities of comparable maturity. To determine the 
yield on a Treasury security, lenders must use the table entitled 
``Treasury Securities of Comparable Maturity under Regulation C,'' 
which will be published on the FFIEC's Web site (https://
www.ffiec.gov/hmda) and made available in paper form upon request. 
This table will provide, for the 15th day of each month, Treasury 
security yields for every available loan maturity. The applicable 
Treasury yield date will depend on the date on which the financial 
institution set the interest rate on the loan for the final time 
before closing. See appendix A, Paragraphs I.G.1. and 2.]
    [rtrif]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 consumer credit transaction that is secured by the 
consumer's principal dwelling with an annual percentage rate that 
exceeds by the specified margin the average prime offer rate for a 
comparable transaction as of the date the interest rate is set. The 
table of market mortgage rates published by the Board indicates how 
to identify the comparable transaction.
    3. Board table. The Board publishes on the Internet, 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 a 
survey. 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 Internet the methodology it 
uses to arrive at these estimates.[ltrif]
* * * * *


    By order of the Board of Governors of the Federal Reserve 
System, July 15, 2008.
Jennifer J. Johnson,
Secretary of the Board.

Attachment I--Methodology for Determining Average Prime Offer Rate

    The calculation of the Average Prime Offer Rate (APOR) is based on 
the Freddie Mac Primary Mortgage Market Survey[supreg] (PMMS). The 
survey collects data for a hypothetical ``best quality'' 80% LTV 1st 
lien 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. Each of the variable-rate products is assumed to adjust to an 
index based on the 1-year Treasury rate plus a margin and to adjust 
annually after the initial fixed-rate period.
    The PMMS collects nationwide average offer prices during the Monday 
through Wednesday period each week and releases the averages on 
Thursday. For each loan type the average commitment loan rate and fees 
and points are reported, each 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 loan rate. For the variable-rate products, the average index 
margin is also reported (also expressed in percentage points).
    The information provided by the PMMS survey is sufficient to 
compute

[[Page 44196]]

an annual percentage rate (APR) for the 30- and 15-year fixed-rate 
products. However, additional information is needed for the two 
variable-rate products. Specifically, an estimate of the fully indexed 
rate (the sum of the index and margin, without regard for any temporary 
discount or premium) is needed. For the two variable-rate products, the 
fully indexed rate is calculated as the margin (collected in the 
survey) plus the future one-year Treasury rate, which is estimated by 
the current one-year Treasury rate.
    The Board uses the rates prevailing during the three-day period in 
which the PMMS is conducted. Specifically, the average of the close-of-
business one-year Treasury rates for Monday, Tuesday, and Wednesday of 
the survey week is used as the estimate of the ``current'' Treasury 
rate used for the fully-indexed component of the variable-rate APR 
calculations. (If data are available for fewer than three days, then 
only yields for the available days are used for the average.)
    Survey data on the initial interest rate, fees and points, and the 
calculated fully indexed rate, are sufficient to compute an APR for the 
one- and five-year variable-rate mortgage products in the PMMS. In 
computing the APR a fully amortizing loan is assumed, with monthly 
compounding (similar assumptions are made for the fixed-rate products) 
and with a two-percentage-point cap in the annual interest rate 
adjustment.
    The PMMS data provide information for only a subset of mortgage 
products. Specifically, the survey does not cover fixed-rate loans with 
terms of less than 15 years nor does it cover variable-rate rate 
mortgages with adjustment periods of other than one or five years. The 
Board uses interpolation techniques to estimate APRs for an additional 
range of products. The interpolation techniques rely on the relative 
yields of different Treasury products.
    Currently, yields are tracked for Treasury securities with terms 
of: one, two, three, five, seven, and ten years. The Board uses these 
data to estimate APRs for two-, three-, seven-, and ten-year variable-
rate rate mortgages which are identical to the one- and five-year 
variable-rate products surveyed in PMMS in all respects except the 
length of the initial interest rate period. The specific estimation 
technique is as follows.
    The margin and fees and points for each interpolated variable-rate 
product are estimated as weighted averages of the margins and fees 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. For the three-
year variable-rate product, the weights are \1/2\ for both. For the 
seven- and ten-year variable-rate products, only the margin and fees 
and points of the five-year variable-rate are used.
    The initial interest rate for each of the interpolated variable-
rate products is estimated by a two-step process. First, a Treasury 
spread is computed as the weighted average of the spread between the 
initial interest on the one-year 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 margin and fees and 
points calculations. The Treasury rates are taken from the Monday-
Wednesday close-of-business averages cited above.
    The second step is to add the Treasury spreads calculated from the 
PMMS data to the Treasury yield for the appropriate term. Thus, for 
example, for the two-year variable-rate product, the estimated spread 
is added to the two-year Treasury rate, while the ten-year Treasury 
rate is used for the ten-year variable-rate estimate.
    Thus estimated, the initial rates, margins, points and fees are 
used to calculate a fully indexed rate and ultimately an APR for the 
two-, three-, seven- and ten-year variable-rate products.
    To calculate APRs for fixed-rate loans with terms of ten years or 
less, the Board uses the initial interest rates (and fees and points) 
of the one-, two-, three-, five-, seven-, and ten-year variable-rate 
loan products calculated above to estimate APRs for fixed-rate loans 
with a term of one, two, three, five, seven, and ten years 
respectively.
    Altogether the Board estimates APRs for ten additional products 
(two-, three-, seven-, and ten-year 30-year term variable-rates and 
one-, two-, three-, five-, seven-, and ten-year fixed-rate term loans) 
to use along with the four products directly surveyed in the PMMS. If 
survey data become available for any of the ten interpolated products, 
survey-based inputs will be used instead of the estimates. These 14 
products cover most mortgages in current use. Assignment rules allow 
coverage of all other products.
    For example, a four-year variable-rate loan will be matched to the 
five-year variable-rate product threshold APR; a six-year to the seven-
year and any variable-rate loan with a repricing interval of more than 
seven years will be matched to the ten-year variable-rate product 
threshold APR. Similar assignments will be used for fixed-rate loans, 
with any fixed-rate loan with a term of more than 15 years matched to 
the 30-year fixed-rate product threshold APR and loans with terms 
between ten and 15 years matched to the 15-year fixed-rate loan 
threshold APR.
    All of the information needed for the above calculations is 
publicly available on Thursday morning of each week. APRs for each of 
the 14 products are posted on the FFIEC Web site by Thursday night. All 
loans locking from Friday through the following Thursday use these APRs 
as the basis of their spread calculations.
    Example:
    The week of May 15, 2008 is used to illustrate the threshold APR 
methodology. On Thursday, May 15th, Freddie Mac released the following 
PMMS information reflecting national mortgage rate averages for the 
three day period May 12 to 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 and fees for the 
30-year and 15-year fixed-rate mortgages are sufficient to compute an 
APR for these two products. The APR is calculated assuming full 
amortization with one-month compounding. The calculated APRs are:

30-year fixed-rate..............................................    6.07
15-year fixed-rate..............................................    5.68
 

    Additional information on the assumed fully-indexed rate is needed 
in order to calculate 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 used for these calculations:

May 12th:
  One-year Treasury.............................................    2.01
  Two-year Treasury.............................................    2.30
  Three-year Treasury...........................................    2.54
  Five-year Treasury............................................    3.00
  Seven-year Treasury...........................................    3.34
  Ten-year Treasury.............................................    3.78
May 13th:
  One-year Treasury.............................................    2.08
  Two-year Treasury.............................................    2.47
  Three-year Treasury...........................................    2.70
  Five-year Treasury............................................    3.17
  Seven-year Treasury...........................................    3.49
  Ten-year Treasury.............................................    3.90

[[Page 44197]]

 
May 14th:
  One-year Treasury.............................................    2.11
  Two-year Treasury.............................................    2.53
  Three-year Treasury...........................................    2.78
  Five-year Treasury............................................    3.22
  Seven-year Treasury...........................................    3.50
  Ten-year Treasury.............................................    3.92
Averaging these figures for the three days implies Treasury
 yields of:
  One-year Treasury.............................................    2.07
  Two-year Treasury.............................................    2.43
  Three-year Treasury...........................................    2.67
  Five-year Treasury............................................    3.13
  Seven-year Treasury...........................................    3.44
  Ten-year Treasury.............................................    3.87
 

    The fully-indexed rate (the estimated interest rate after one-year) 
for the one-year variable-rate mortgage is calculated as the 
appropriate Treasury yield plus the margin: 2.07 + 2.75 = 4.82. 
Similarly, the fully-indexed rate (the estimated interest rate after 
five-years) for the five-year variable-rate mortgage is calculated as: 
3.13 + 2.75 = 5.88.
    The initial rate, fees and points, and fully-indexed rate are 
sufficient to compute APRs for the one-year and five-year variable-rate 
products. Full amortization, monthly compounding, and a two-percentage-
point cap in the annual change in rates are assumed. The calculated 
APRs are:

One-year variable-rate rate.....................................    4.91
Five-year variable-rate rate....................................    5.82
 

    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 is 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.....................  2.75 + 2.43 = 5.18
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.....................  2.75 + 2.67 = 5.42
 

    Full amortization, monthly compounding, and a two-percentage-point 
cap in the annual change in rates yields calculated APRs of:

Two-year variable-rate rate.....................................    5.27
Three-year variable-rate rate...................................    5.49
 

    APRs for seven-year and ten-year variable-rate mortgages are 
estimated using the survey data for the five-year variable-rate 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.....................   2.75 + 3.44 = 6.19
Ten-year variable-rate:
  Initial rate...........................  (5.57 - 3.13) + 3.87 = 6.31
  Fees & Points..........................  = .6
  Margin.................................  = 2.75
  Fully-indexed rate.....................  2.75 + 3.87=6.62
 

    Full amortization, monthly compounding, and a two-percentage-point 
cap in the annual change in rates yields calculated APRs of:

Seven-year variable-rate rate...................................    6.09
Ten-year variable-rate rate.....................................    6.47
 

    The initial rate and fees and points of the variable-rate mortgages 
calculated above are used to estimate threshold APRs for fixed-rate 
products with terms of ten years or less. The estimates are as follows:

One-year fixed:
  Initial rate.................................................     5.18
  Fees & Points................................................      .7
  APR..........................................................     5.96
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. E8-16501 Filed 7-29-08; 8:45 am]
BILLING CODE 6210-01-P