The Consumer Financial Protection Bureau is shifting the underlying interest rate source used in calculating what constitutes a higher-priced mortgage loan to data sourced from ICE Mortgage Technology from the weekly Freddie Mac survey.
Based on the type and purpose of the mortgage, varying thresholds were established under Dodd-Frank that are based on how much the annual percentage rate is above what the CFPB determines the Average Prime Offer Rate to be. Additional lender requirements kick in for loans above the threshold. Also, for the qualified mortgage test, the loan cannot be priced more than 225 basis points above the APOR.
Until now, the regulator had been taking the data from the Freddie Mac Primary Mortgage Market Survey to create this index. But as of Nov. 17, 2022, Freddie Mac shifted its data source from a survey of participating lenders to data pulled from its Loan Product Advisor automated underwriting engine.
As part of that, Freddie Mac discontinued support for the 5/1 Treasury-indexed adjustable-rate mortgage, as well as points and fees across all product types, all of which the CFPB used in its calculations.
This led CFPB to seek an alternative, and it found that the ICE Mortgage Technology data was “the most suitable option,” a notice from the agency said. This data will be taken from the Encompass loan origination system.
In addition, the CFPB is adding more products to the APOR dataset, including the 20-year fixed-rate mortgage and a 10-year/6-month adjustable. It is removing the 1-year variable-rate mortgage “to ensure there is a firm basis for estimating APORs,” the notice said.
“Having data for more than two kinds of fixed-rate mortgage products and more than two kinds of variable-rate mortgage products provides a firmer basis for estimating rates across a full range of fixed-rate and variable-rate mortgage products.”
The change goes into effect this Thursday, April 21. It will not require the CFPB to update prior information.
However, for many originators, the issue was not about the source of the data the CFPB uses, but the timeliness of when it was updated, said Jeffrey Naimon, a partner in the Orrick, Herrington & Sutcliffe law firm.
“By its nature, it is a backward looking index,” he explained. The Freddie Mac data is published on a Thursday, but the CFPB does not put out the APOR until the following Monday. That is not changing with this switch.
And as has happened recently in the current volatile rate environment, lenders can get caught making loans that might slip into the high-priced category.
So when rates rise, “the lenders are really unhappy because it’s going to have the effect of restricting the market,” Naimon said
On the other hand, if rates fall too quickly in the days after the CFPB grabs the rate data, lenders could be dealing with loans that are now outside of their guidelines. Many lenders do not originate high-cost loans because of the extra regulatory requirements attached to them.
Naimon noted that the CFPB originally used a Treasury bond rate to make the calculation, but many in the industry pointed out that so many other factors influence it “so it was not a great index for what was happening in the market.”
So the government turned to the Freddie Mac PMMS because it was an existing data source from a trusted entity, “it wasn’t going to be a manipulated number,” he continued.
Ironically, another branch of the government, the Federal Trade Commission, is seeking to halt Intercontinental Exchange’s purchase of Black Knight given the would-be combination’s alleged domination in two areas involving mortgage rate information: the loan origination system category, and in the product and pricing engine area.