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Thursday, June 11, 2015

Determination of APOR upon Relock of Loan

QUESTION
We are having an internal debate as to how the HPML APOR is determined when a rate lock has expired and the rate is relocked.

When the rate lock expires, we need to relock the interest rate which provides a new lock in date, which in turn results in a new APOR being used for the purposes of the HPML test. This can be problematic in an improving market. For example, in instances in which we have relocked the interest rate and terms identical to those set forth in the expired lock, the new APOR is lower and the loan may now fail the HPML test. This situation often arises when the loan officer allows the rate to expire in order to enable the loan officer to relock at the same rate and pricing without charging the borrower a rate lock extension fee.  

Our Secondary Department has determined that the APOR for the HPML test should be based on the rate sheet date used to price the loan as that is how the rate is “set”. 

Can you please provide us with some guidance as to the date to be used?  Also, if the rate lock has expired completely, can we simply extend the rate lock keeping the same rate/pricing and lock in date, as opposed to relocking the loan? 

ANSWER
For the purposes of the HPML test, the APOR should be based on the date the rate is actually locked pursuant to the last rate lock agreement. 

See Official Commentary to paragraph 35(a):

“2. Rate set. A transaction's annual percentage rate is compared to the average prime offer rate as of the date the transaction's interest rate is set (or “locked”) before consummation. Sometimes a creditor sets the interest rate initially and then re-sets it at a different level before consummation. The creditor should use the last date the interest rate is set before consummation.”

See also FFIEC’s “Data Requirements for the Rate Spread Calculator”:

“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."

As to “extending” a rate, when the rate lock agreement has completely expired instead of relocking, you cannot do so. If the rate has expired completely, the loan has started to float.  Thus, you need to relock. 

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group