The "high rate" portion of predatory lending tests generally involves a comparison between, on the one hand, a loan's APR and, on the other hand, "the yield on Treasury securities having comparable periods of maturity on the 15th day of the month immediately preceding the month in which the application is received by the creditor," plus a certain percentage.  Of course, this process is completely automated within the DocMagic high cost tests.  The purpose of this memo is to explain where to find Treasury security yield information and, once there, which yield value to use.

Where to find treasury security yields:

The commentary to Regulation Z's Section 32 (12 CFR §226.32) authorizes lenders to "use the yield on actively traded issues adjusted to constant maturities published in the [Federal Reserve] Board's "Selected Interest Rates" (statistical release H-15)." Click here for the H-15 weekly releases that are available online.  You may also find the list of U.S. Treasury Yields on our website here.

Once there, click on any recent weekly release.  You will find the "constant maturity" nominal yields published in the H-15 statistical release under the heading "U.S. Government Securities."

Here is a screen shot of what you should see:

Click for larger image

 

You will note that there are several such yields published: 1-month, 3-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year and 30-year.  Which yield should be used depends on these two factors: (1) the application date; and (2) the term of the loan.

Which treasury security yield value to use:

First, determine the Application Date: Section 32 requires that lenders use a yield as of the 15th of the month immediately preceding the month in which the lender receives the application. For example, if the lender receives an application anytime in January, then the relevant yield is the one published in the H-15 on December 15.  If the lender receives an application in February, the yield published on January 15 is used. And so on. A couple of points of clarification:

• It doesn't matter when in a particular month you receive the application; you always look back to the 15th of the preceding month.  For example, regardless of whether you receive the application on March 1 or March 31, you always look for the corresponding yield as of February 15.
• The relevant application date is the date that the lender receives the application.  So, if a wholesale lender receives an application through an intermediary agent or broker, the application date is when the lender, not the intermediary agent or broker, receives the application.
• If the 15th of the preceding month falls on a weekend or a holiday, you use the yield as of the business day immediately preceding the 15th.  Normally this means that if the 15th falls on a Saturday or Sunday (or Monday if it is a holiday), then you would use the yield as of the immediately preceding Friday.  However, that is not always the case.  For example, April 15, 2006 fell on a Saturday.  Normally, you would have used the yield as of the business day immediately preceding that date, or Friday, April 14, 2006.  However, Friday, April 14, 2006 also happened to be Good Friday; markets were closed and no yields were published on that day.  Therefore, you would have used the yields published as of Thursday, April 13, 2006.

Second, determine the term of the loan: Security requires that lenders use the yield corresponding to the constant maturity that is closest to the loan's maturity.  Thus, for example, if a loan has a 30-year term, then you would use the yield for a Treasury constant maturity security having a 30-year maturity; for a loan with a 10-year term, the yield for a Treasury constant maturity security having a 10-year maturity.  And so on.  A couple of points of clarification:

• If a loan's maturity is exactly halfway between security maturities, you use the yield for the Treasury securities having the lower yield. For example, assume you are making a "30 due in 15" balloon loan.  There is no yield for a Treasury constant maturity security having a 15-year maturity published in the H-15 statistical release.  However, the 15-year term falls exactly between two yields that are published, namely the 10-year and 20-year Treasury constant maturity securities. In this case, you would use the lower of the two yield values.  For example, if the 10-year yield is 4.77% and the 20-year yield is 4.96%, you would use the 10-year yield.  The same rules would apply to loans with terms of, for example, 25 years (use the lower of the 20-year and 30-year Treasury constant maturity securities).
• If the term of the loan does not correspond exactly to a Treasury constant maturity security, or fall exactly halfway between two Treasury constant maturity securities, you use the yield of the of the Treasury constant maturity security closest to the loan's maturity.  For example, for a loan with a 8-year term, use the yield for the 7-year constant maturity security; for a loan with a 9-year term, use the yield for the 10-year constant maturity security.
• Finally, if the loan's maturity is more than 30 years, use the yield for the 30-year constant maturity security.

If you have any questions regarding the selection of the Treasury yield, please contact DocMagic's Compliance Department.