HOEPA & Adjustable rate loans

Which treasury rate should be used for the APR calculation test on an adjustable rate loan? For example, a 3/1 arm based on a 30-year maturity. Rate adjusts every 3 years based on the 1-year treasury as the index plus margin. The Commentary Reg Z at 226.32(a)(1)(i) states "creditors must use the yield on the security that has the nearest maturity at issuance of the loan's maturity." But using the 30-year treasury really is not a true reflection of how the loan is priced.

You should use the 30-year treasuries. The measurement for HOEPA -- and soon for HMDA reporting purposes -- doesn't seek to measure the accuracy of your use of your pricing index. It is looking for a standard by which to measure all pricing. For that purpose, HOEPA compares whatever pricing system or method you use to the Treasury standard. This also means that you have to track loans by two indexes.

Lucy is correct but I wish to clarify one issue. The H-15 report no longer lists a 30 year Treasury security. Here's a quote from the 2/25/02 H-15 report:

H.15 no longer reports a 30-year constant maturity yield for Treasury securities and begins reporting a yield for Treasury securities with 25 years or more remaining to
maturity.

From the H-15, would you then use the Treasury Long-Term averages (25 years and above), or the Treasury Constant Maturities 20-year?

You would use the 25 year comparable maturity since it is closer than 20. See the instructions for when to use the nearest and when to look at one where the maturity is exactly between two. 226.32(a)(1)(i) 4

I hate to keep going over this, but I need some clarificaiton. If you have a four year loan, would you use the 5-year treasury rate or the 2-year treasury rate? I know that the 5-year is the closest, but is it best to go up or down?

My understanding of this is that you use the maturity closest to the loan term. If the loan term is exactly between two maturities, use the maturity with the lower rate.

You are correct in that you are to use the maturity that is closest to the maturity of the loan, however at a workshop I attended, sponsered by the Indaiana Bankers Association and conducted by the Pegasus Educationanl Services, we were instructed that if it was exactly in the middle that you used the lower term, not the lower rate, i.e. if you have a 15 year term on the loan you would use the 10 yr treasury rate, not the 20 year.

Also if the 15th falls on a weekend or a holiday you use the first business day immediately preceding the 15th as that was the rate in effect on the 15th.

In Suewannee's example, she would use the 3 year treasury rate.

dpersfull, I'd ask for clarification from the folks who conducted the seminars, because that is not what the regulation states

226.32(a)(1)(i) 4 -... If the loan maturity is exactly halfway between, the annual percentage rate is compared with the Treasury security that has the lower yield. For example, if the loan has a maturity of 20 years and comparable securities have maturities of 10 years with a yield of 6.501 and 30 years with a yield of 6.906, the annual percentage is compared with 10 percentage points over the yield of 6.501, the lower of the two yields.

I just got finished looking that up from the cite a couple of posts up and I agree that we should be using the lower rate. It does appear that we were instructed wrong by the instructer. The materials they gave us does not have contact information (just says they're out of Louisville), but I have noticed that one of the persons from this group, not the one that did the seminar, does post on this forum from time to time, so maybe he will catch this.

Thanks Dean for pointing this out.

Thank you so much for clearing up this issue.

Dean is absolutely correct. In most cases, the lower term is going to have a lower rate, so maybe this is what the Pegasus speaker was saying. (I'm not trying to defend the speaker, but I could see someone saying that to make it simple).