VIDEO: HMDA Rate Spread Term Not in Whole Years
In this Compliance Clip (video), Adam explains the rules for determining the rate spread term when it isn't expressed in whole years. Adam breaks down the steps and provides clarity on how to handle these non-standard loan terms in your HMDA reporting.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about the HMDA rate spread term when it's not in whole years and how to use that in relation to the rate spread calculator. So this is a HMDA topic.
The question we have here is this: what term do we use for the rate spread calculator under HMDA if the term isn't in whole years? For example, what if a fixed loan is a five and a half year loan? Or what about a seven and a half year ARM where it adjusts after seven and a half years? Or what about situations where the initial adjustment is based on days rather than months? What do we do for the rate spread calculator? What year do we use?
Well, the answer to this of course is going to come from Regulation C that implements HMDA but it's going to come from the commentary to 1003.4(a)(12i). This section talks about the rate spread.
The commentary to 1003.4(a)(12i) says this, “For fixed rate transactions, the term for identifying the comparable transaction for the rate spread is the transaction’s maturity.” So we're going to use the maturity for a fixed rate loan. So if it's a 30-year fixed rate loan, we're going to use 30. That's what we're going to use. If it's a seven and a half year fixed rate loan, we're going to use seven and a half years. But we'll see how that applies when it's not a full year.
For a variable rate transaction, the term for identifying the comparable transaction or the rate spread is the initial fixed rate period which is the period until the first scheduled rate adjustment. So for example, five years is a relevant term for a variable rate transaction with a five-year fixed rate introductory period that is amortized over 30 years. So that's what we have to look for as far as fixed rate versus variable rate.
However, comment 4(iii) to 1003.4(a)(12i) tells us what to do when a term is not in whole years. So the example I just gave us seven and a half years, we can't list seven and a half. So what do we do? How do we round? How do we round up or round down? What do we do? Well, here's what they tell us. They say that when a covered loan’s term to maturity or for a variable-rate transaction, the initial fixed rate period is not in whole years, the financial institution uses the number of whole years closest to the actual loan term or if the actual loan term is exactly halfway between the whole years, by using the shorter loan term. So for example if a loan term has ten years and three months the relevant term we use for the rate spread calculator is ten years. For a loan term of ten years and nine months we round up to eleven years. If a loan term has ten years and six months, it's exactly halfway between the year, we round down to ten years.
Now, they go on and they tell us that if a loan term includes an odd number of days in addition to odd number of months, the financial institution rounds to the nearest whole month or rounds down if the number of odd days is exactly halfway between two months. They also say the financial institution rounds to one year any covered loan with a term shorter than six months including variable rate covered loans with no initial fixed rate period. So we don't round down to zero if it's three months, we round to one year if it's less than six months instead of listing zero for the rate spread. The example they give us here is for example, in an open and covered loan if it has a rate spread that varies according to an index plus a margin with no introductory fixed-rate period, the transaction term is one year.
So that's how we use term in calculating rate spread under HMDA. And that's all I have for you for this HMDA related Compliance Clip.