On February 9, 2006, the U.S. Treasury Department had its first sale of 30-year bonds, resurrecting a debt security that had been discontinued in February 2002. We'll leave it to the pundits to tell us what this means for investors, the deficit and the economy in general. For those of us who deal with predatory lending matters, the reintroduction of the 30-year bond will have an impact on high cost calculations beginning March 1, 2006.

When people talk about predatory or high-cost loans, most often they are referring to loans with points and fees that exceed a certain percentage of the total loan amount. However, the federal Section 32 high cost analysis and all state-specific high cost analyses (with the exception of Minnesota and West Virginia) contain some form of "APR test." Most often this test involves the following formulation: a loan is a high cost loan if the loan APR exceeds by [X] % the yield on Treasury securities having comparable periods of maturity as of the 15th day of the month immediately preceding the month in which the application is received by the creditor. There are some variations in a couple of states (e.g., the loan interest rate rather than the loan APR may be used as the point of comparison), but, by and large, this formulation is the one most commonly in use.

The commentary to Section 32 clearly states which Treasury yield values should be used for comparison purposes: "Creditors must use the yield corresponding to the constant maturity that is closest to the loan's maturity. If the loan's maturity is exactly halfway between security maturities, the annual percentage rate on the loan should be compared with the yield for Treasury securities having the lower yield." At the time that the federal Section 32 high cost test was first enacted, 30-year bonds were being sold and their yield values were published in the Federal Reserve Board's H-15 bulletin. Thus, when a loan had a 30-year term, it was clear that the 30-year Treasury yield value was used for comparison purposes. If the loan had a 25-year term, it was equally clear that the lower of the 20-year and 30-year Treasury yield value was used for comparison purposes. Finally, if the loan had a term between 26 and 30 years, or greater than 30 years, then the 30-year Treasury yield value was also used for comparison purposes.

After the sale of 30-year Treasury bonds was discontinued, there was some confusion as to which yield value should be used for loans with 30-year terms. The staff of the Federal Reserve Board resolved this question in comment 4(iii) to the commentary to Regulation Z Section 226.32(a)(1)(i):

iii. If a mortgage loan has a term of 30 years, and the H-15 does not contain a yield for 30-year constant maturities, but contains a yield for 20-year constant maturities, and an average yield for securities with remaining terms to maturity of 25 years and over, then the annual percentage rate on the loan is compared with the yield for 20-year constant maturities.

Accordingly, ever since the sale of 30-year bonds was discontinued, the 20-year constant maturity Treasury yield value has been used for comparison purposes with respect to not only 30-year term loans, but all loans with terms of greater than 20 years.

Now that the sale of 30-year Treasury bonds has been reintroduced and the 30-year Treasury constant maturity yield values are once again being published in the H-15 bulletin (Click here for the H-15 bulletin.), the 30-year Treasury yield value will once again be used for comparison purposes for loans with 30-year terms for the federal Section 32 and state-specific high-cost APR tests with respect to applications received by a creditor on or after March 1, 2006 (or in the case in New Mexico loans, loans made on or after March 1, 2006). With respect to applications received by a creditor before March 1, 2006 (or in the case in New Mexico loans, loans made before March 1, 2006), the 20-year Treasury yield value will still be used for 30-year term loans. These upgrades have already been implemented and will run automatically in all DocMagic software products.

What does this change mean as a practical matter? It is important to note that historically, 30-year Treasury yield values are lower than the 20-year Treasury yield values, often by as much as 40 or more basis points. The 30-year Treasury yield value as of February 15, 2006 is 4.58%, 20 basis points below the 4.78% 20-year Treasury yield value as of that date. This means that the APR test high-cost thresholds for loan terms greater than 25 years, including 30-year term loans, will be almost always lower (and sometimes perhaps substantially lower) than would be the case if the 20-year Treasury yield value were to be used.

Please feel free to contact the DocMagic Compliance Department, at (800) 649-1362, if you have any questions.

Bill Lambropoulos is the General Counsel and Director of Compliance and Legal Services at Document Systems, Inc.