Home Mortgage Disclosure, 63329-63338 [E8-25320]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 73, Number 207 (Friday, October 24, 2008)]
[Rules and Regulations]
[Pages 63329-63338]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-25320]



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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 https://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 (https://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 
(https://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 https://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 yiel