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Banking Interpretations

NYSBL 6-L
Gen. Reg. Part 41

New York State Banking Department
Memorandum

To:

 

Deputy Ricketts

 

From:

 

Alan M. Weinberg

 

Date:

 

June 27, 2007

 

Subject: Mortgage Banking -Part 41 APR Threshold [---] Inquiry

Issue

Does the term "rate" as used in Part 41.1(e)(6) refer to annual percentage rate (APR) or interest rate?

Recommendation
 
The term "rate" as used in Part 41.1(e)(6) refers to interest rate and [---] Service, Inc. should be advised accordingly. You may also wish to provide the appropriate calculations and the reasoning therefor) with respect to two hypothetical scenarios supplied by [---].

Background

[---] Service, Inc. sent an inquiry to the Department asking what the proper interpretation is for the term "rate" as used in Part 41.1(e)(6). They provided two hypothetical scenarios and asked the Department to provide the appropriate calculations and the reasoning therefor with respect to the two scenarios.

Reasoning

Part 41.1(e)(6) contains one component of the definition of "High cost home loan;" namely, a residential mortgage loan where the terms of the loan exceed one or more of several thresholds. The APR thresholds differ, but each contains the same proviso. In the case of a first mortgage loan, the threshold is as follows:

(i) the loan is secured by a first mortgage on the borrower's principal dwelling and the annual percentage rate at consummation, including without limitation any points and/or bona fide discount points, will exceed by more than eight percentage points the yield on United States Treasury securities having comparable periods of maturity to the loan maturity measured as of the 15th day of the month immediately preceding the month in which the application for the residential mortgage loan is received by lender; provided, however, if the terms of such loan offer any initial or introductory rate, and the annual percentage rate is less than such rate that will apply after the end of the period of such initial or introductory rate, then the annual percentage rate for purposes of determining the application of this threshold to such loan shall be the rate which applies after such initial or introductory period...; (Emphasis added.)

The highlighted term "rate" as used in the proviso in the quoted language above in Part 41.1(e)(6) is being questioned. Here, the term has relevance only for loan transactions with a so-called "teaser" rate, i.e., a rate that remains in effect for an introductory period, and the proviso sets forth an exception to the general rule that whether the threshold has been exceeded is determined with reference to the APR.
 
The term "rate" as used here refers to interest rate (and not APR) for at least two reasons.

First, the proviso sets forth an exception to the general rule that the APR determines whether the threshold has been exceeded. Thus, it would make no sense for reference rate in the proviso (when the term "rate" as used) to refer to APR; hence it must refer to interest rate.

Second, one must recognize that, in general, there is one APR in any given closed end credit transaction. That being the case, and given the earlier reference to the term APR in the proviso, it makes no sense to read the term "rate" as "APR;" thus it must be read as "interest rate."

As a result, where there is a "teaser" or introductory rate, and the interest rate that will apply thereafter is higher than the APR, the regulation requires application of that interest rate in lieu of the APR in order to determine whether the threshold has been exceeded.

This is the rule to apply if you wish to provide the calculations (and the reasoning therefor) with respect to two hypothetical scenarios supplied by the inquiror.

AW

Noted: MEG.