Topping the high APR hurdle
A consumer-purpose mortgage origination secured by the borrower’s primary residence earns a Section 32 designation, and thus section 32 compliance, based on a three-step set of APR tests, which:
- determine the annual percentage rate (APR) threshold which applies to the mortgage;
- calculate the APR for the mortgage; and
- compare the APR for the mortgage to the Average Prime Offer Rate (APOR) for a comparable mortgage.
A loan becomes subject to Section 32 requirements through the APR test when the APR on the total loan amount exceeds the Average Prime Offer Rate (APOR) for a comparable transaction on the same date by more than:
- 6.5 percentage points for first lien transactions;
- 8.5 percentage points for first lien transactions if the residence is personal property and the transaction is for less than $50,000; or
- 8.5 percentage points for junior lien transactions. [12 CFR §1026.32(a)(1)(i)]
For the following examples, you are to assume other factors (points and fees and prepayments) do not make the loan a Section 32 loan.
Example 1
Consider a second trust deed consumer-purpose mortgage origination of $10,000 secured by the borrower’s primary residence. The APR on the mortgage is 6%. The APOR for a comparable transaction is 4%.
Is this transaction a Section 32 loan?
No! The mortgage origination is a junior lien, to which an 8.5 percentage point threshold applies. The difference between the APR and the APOR is only 2%. Thus, the loan is not a Section 32 loan.
Example 2
Consider a first trust deed consumer-purpose mortgage origination of $45,000, secured by an RV used as a primary residence. The APR on the loan is 15%. The APOR for a comparable transaction is 8%.
Is this transaction a Section 32 loan?
No! The consumer mortgage origination is a first lien secured by personal property and less than $50,000, the 8.5 percentage point threshold applies. The difference between the APR and the APOR is 7%. Thus, the loan is not a Section 32 loan.
Example 3
Consider a first trust deed consumer purpose mortgage origination of $150,000, secured by a second home. The APR on the loan is 6.5%. The APOR for a comparable transaction is 6.0%.
Is this transaction a Section 32 loan?
No! The consumer mortgage origination is a first lien secured by real estate, requiring the APR to exceed the APOR by 6.5 or more percentage points to be designated a section 32 mortgage. In this scenario, the APR is actually less than the APOR on a comparable transaction. Thus, the loan is not a Section 32 loan under the APR test.
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