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Volume 2, Issue 2, 2002   Federal Reserve Bank of Dallas

Applying the APR Test

A first-lien home equity loan is covered by HOEPA if the loan's APR exceeds the yield of a Treasury security with a comparable maturity by more than 8 percentage points. A subordinate-lien loan is covered by HOEPA if the loan's APR exceeds the yield of a Treasury security with a comparable maturity by more than 10 percentage points. If a loan meets either the APR test or the points and fees test, the loan falls under the requirements of HOEPA.

Using the value and properties from the loan example, the following APR test is performed.

Disclaimer: This example is presented strictly for illustrative purposes. All results disclosed by the example are estimates, and the Federal Reserve Bank of Dallas assumes no liability or responsibility for computational errors. No guarantee, explicit or implied, is made regarding its accuracy or suitability to a specific purpose.

Note: Restrictions may apply, and results may vary depending on the borrower's data. We based our example on the assumption that the loan is a simple-interest loan.

Step 1: Identify the disclosed APR 14.79

Step 2: Identify the lien status subordinate-lien mortgage

Step 3: Determine the APR spread.
This value will be 8 percentage points for first-lien mortgages or
10 percentage points for subordinate-lien mortgages.
10

Step 4: Identify the yield on Treasury securities.
Current rates can be found at: www.federalreserve.gov/releases/h15/update/ Off-site page

Note: For this example, we used the Treasury constant maturity rate as of 3/15/02.
See an example of how this rate was identified.

5.35

Step 5: Calculate the yield on Treasury securities plus the APR spread.
           Yield on
Treasury
Securities
  APR
Spread
   
  5.35  +  10  =  15.35

Step 6: Determine if the loan's disclosed APR is greater than the yield on Treasury securities plus the APR spread to see if the loan is subject to the high-cost rules under HOEPA.
           Disclosed
APR
  Yield on Treasury Securities
Plus APR Spread
  14.79 <= 15.35

NO, the loan's disclosed APR is NOT greater than the yield on Treasury securities plus the APR spread.

The result is NO; therefore, the loan is NOT subject to the high-cost rules under HOEPA according to the APR test, but may still qualify under the points and fees test.

If the result had been YES, the loan would be subject to the high-cost rules under HOEPA according to the APR test (provided that the loan is secured by the customer's principal dwelling and is not a residential mortgage transaction, a reverse mortgage transaction or an open-end credit plan).


See how the changes to Regulation Z affect high-cost home equity loans:

Full text of changes to Regulation Z:


e-Perspectives, Volume 2, Issue 2, 2002

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The views expressed are the authors' and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Community Development Office.

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