Anna DeSimoneUnderstanding Higher-Priced Mortgage Loans (HPML) and the Average Prime Offer Rate (APOR)

by Anna DeSimone*

The recent amendment to Truth-in-Lending established a new category called Higher-Priced Mortgage Loans. Known as HPMLs, provisions apply to applications received on or after October 1, 2009.

HPMLs are not to be confused with HOEPA loans (Home Owner Equity Protection Act) which carry different rules, tolerance levels and state-specific regulations. HPMLs are loans secured by the borrower's principal dwelling that are priced at an APR (Annual Percentage Rate) exceeding a new index published by the Federal Reserve Board named the Average Prime Offer Rate (APOR).

Based on the date the interest rate is set (locked or re-locked) lenders must compare their APR with the Fed’s APOR index. The loan will be considered a higher-priced mortgage loan if the APR exceeds the index by:

  • 1.5 or more percentage points on First Liens
  • 3.5 or more percentage points on Subordinate Liens

The Federal Institutions Examination Council (FFIEC) publishes the Average Prime Offer Rate (APOR) on behalf of the Federal Reserve Board. To determine whether or not your loan is considered a Higher-Priced Mortgage Loan, go to the FFIEC website at and select Rate Spread Calculator from the Consumer Compliance menu on the homepage. This link can be directly accessed as follows:

The FFIEC’s intent is to provide a rate spread calculator for HMDA reporting. This site does not mention Truth in Lending; however, index applied to HPML is also used for HMDA. On the rate spread main page, there is a quick calculator available on the bottom that can be used to compare your APR to the index. After choosing Fixed or ARM, enter the lock-in date, APR, # years and lien status. Click on “submit” and the system will calculate the spread. Please note there is no answer box. The page will pop back up to the top and you need to scroll back down to see the answer on the blank space underneath. If the rate spread exceeds 1.5%, the message will display the calculated rate spread. If you are within compliance, the message will state “N/A.”

On the same page of the FFIEC Rate Spread site you will notice the following links which take you directly to the tables:

Average Prime Offer Rates - Fixed
Average Prime Offer Rates - Adjustable

To view the tables themselves, click on the appropriate Fixed or Adjustable links. Both tables are provided in gigantic Excel spreadsheets that begin in the year 2000. The current weekly index will be over 500 rows down. Since the spreadsheet was not formatted to continuously show the column headings, I suggest you scroll directly to column “AE” if the loan is a 30-year, highlight that column, and then scroll all the way down to the bottom row.

The intersection of these two points (row & column) will provide the current APOR index. For first liens, add 1.5 % to the listed index if the loan was locked in (or re-locked) during the week following the date. For example, if your APR is 7.09 and you subtract 1.5 your answer is 5.59. If your answer is higher than the posted index, which is currently 5.09 your loan is classified as an HPML.

Freddie Mac Primary Mortgage Market Survey (PMMS)

The information which forms the basis for the Federal Reserve’s index is the Freddie Mac Primary Mortgage Market Survey (PMMS). The PMMS posts the weekly interest rates for 15 and 30-year fixed and the rates for 1 and 5-year ARMs. The survey also posts the weekly average fees and points, reflected as a percentage of the loan amount. The PMMS survey tracts interest rates; however, the new HPML rule requires lenders to compare their APR to the Fed index. While there has been no guidance published as to how to use the PMMS for compliance testing, lenders would benefit from referring to the PMMS in tandem with the APOR. Freddie Mac’s PMMS can be accessed from the following link:

Higher-priced mortgage loans do not include:

  • Construction Financing
  • Temporary or bridge loans 12 months or less
  • Reverse mortgages
  • Home Equity Line of Credit

If you have determined that your loan is an HPML – what’s next?

Make sure that you document the borrower’s ability to pay.

To comply with the new law, lenders must verify the consumer’s repayment ability as follows:

  • Verify income to cover repayment ability through W-2, tax returns, paystubs, financial institution records or third party verifications
  • Verify the borrower(s)’ current obligations through credit reports and other documents

A creditor is presumed to have complied with this rule if they have verified the borrower’s repayment ability and determined repayment ability of P&I scheduled for the first seven years, taking into account their obligations. The lender may utilize debt ratios or disposable income. For certain loans, such as terms of 7 years or less or increases in principal balance, no presumption of compliance is available. Creditors are prohibited, within one year of having extended credit subject to this new law from the refinancing of any loan subject to the same borrower into another loan unless the refinancing is in the borrower's interest. The law has other provisions regarding escrows, selling and assigning a mortgage.

*Anna DeSimone is President of Bankers Advisory, Inc., a Massachusetts-based audit and consulting company specializing in mortgage banking compliance and quality control.

Disclaimer: The information presented in this article represents the opinion of the author and not that of AllRegs. This article is not meant to be nor should it be construed as advice of legal counsel. The applicability of the information contained herein will vary based on the nature of each lending institution's business, under what law it was created, and its loan products and procedures. Readers are strongly urged to consult with their legal counsel and/or contact local counsel as appropriate in the various states and jurisdictions to determine the applicability of the materials contained herein to the specific facts and circumstances of each organization's programs and products and to identify other law applicable to its business operations. The information contained herein was not reviewed or approved by counsel in the respective jurisdictions.

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