The Section 32 coverage analysis is the test that determines whether a seller-carry on an owner-occupied home falls inside the high-cost mortgage rules of §1026.32. The analysis takes an afternoon, produces a written workpaper, and sits in the loan file as the documentation of the pricing decision at closing.

Step 1 — Confirm the loan is consumer-purpose

Pull the buyer’s identification, the occupancy affidavit, the insurance binder, and the deed application. Confirm the property is the buyer’s primary residence. A consumer-purpose loan on a dwelling triggers Regulation Z under §1026.3. A business-purpose loan to an investor purchasing a rental falls outside Regulation Z and outside Section 32 — document the business purpose with a lease plan, a rental history, or a separate primary residence record.

Step 2 — Pull the average prime offer rate

Visit ffiec.gov and pull the average prime offer rate for the week the rate on the seller-carry note is set. Pull the rate for the matching loan type — fixed-rate term to match the loan, or adjustable-rate index to match an ARM. Record the rate, the publication date, and the matching loan category in the workpaper.

Step 3 — Calculate the loan APR

The annual percentage rate runs under §1026.22 — the interest rate on the note plus the cost of credit prepaid at closing, expressed as an annualized rate. The §1026.22 calculation produces a different number than the note rate where the loan carries upfront fees. Use the §1026.22 APR for the Section 32 spread test, not the note rate.

Step 4 — Run the APR spread test

Compare the loan APR to the APOR. The §1026.32(a)(1)(i) threshold runs at one level for a first-lien loan above the statutory loan-size cutoff, a higher level for a first-lien loan below the cutoff, and a different level for a subordinate-lien loan. Identify the applicable threshold and subtract the APOR from the loan APR. If the spread exceeds the threshold, the loan crosses the APR spread test.

Step 5 — Build the points-and-fees worksheet

List every charge the borrower pays at or before closing that §1026.32(b)(1) sweeps into the points-and-fees calculation — origination fees, points paid by the borrower, most third-party fees the seller selects, and the items specifically enumerated in the rule. Exclude the items §1026.32(b)(1) carves out. The total is the loan’s points and fees.

Step 6 — Run the points-and-fees test

Compare the points and fees to the §1026.32(a)(1)(ii) threshold. The threshold is expressed as a share of the total loan amount for loans above the statutory size cutoff and as a dollar threshold for loans below it. The total loan amount runs under §1026.32(b)(4). If the points and fees exceed the threshold, the loan crosses the points-and-fees test.

Step 7 — Document the coverage outcome

Record the analysis result on the workpaper — the APR, the APOR, the spread, the applicable threshold, the points and fees, the share of total loan amount, the points-and-fees threshold, and the coverage outcome. A loan that crosses either test is a Section 32 loan. A loan that crosses neither test is outside Section 32.

Step 8 — Run the disclosure timeline if covered

Where the analysis identifies the loan as covered, the §1026.32(c) disclosure delivers to the borrower at least three business days before closing. Adjust the closing date where the analysis runs late, and document the disclosure delivery with a signed receipt in the loan file. Closing inside the three-business-day window violates the rule.

Step 9 — Restructure or rescope where the loan terms violate Section 32

A covered Section 32 loan cannot carry a balloon under §1026.32(d)(1), a prepayment penalty under §1026.32(d)(6), or negative amortization under §1026.32(d)(2). Where the note draft includes a prohibited feature, restructure the note as a fully amortizing loan without the prohibited feature, or restructure the deal to stay outside Section 32.

Step 10 — File the workpaper and the supporting records

The workpaper, the APOR pull printout, the §1026.22 APR calculation, the points-and-fees worksheet, the occupancy records, the signed §1026.32(c) disclosure (if covered), and the truth-in-lending disclosure under §1026.18 file in the loan jacket. The file produces the documentation a state examiner or note buyer requests.

Frequently Asked Questions

What is the difference between the §1026.32 APR and the note rate?

The §1026.32 APR is the §1026.22 annual percentage rate — the note rate plus the cost of credit prepaid at closing, expressed as an annualized rate. The note rate is the contractual interest rate on the promissory note. The two differ when the loan carries upfront fees the borrower pays at or before closing.

Does the points-and-fees test include third-party closing costs?

The §1026.32(b)(1) calculation sweeps in most fees the borrower pays at closing where the seller selects the third party and the fee is not a §1026.32(b)(1) carve-out item. The rule lists the specific items in and the specific items out — the calculation follows the rule, not the closing statement format.

What if the analysis is run after closing?

A post-closing analysis that identifies the loan as covered does not cure the §1026.32(c) disclosure timeline. The disclosure had to run before closing, and the closing occurred inside the window the rule prohibits. The seller consults qualified legal counsel on the §1026.32(a)(3) rescission rights and on the cure path available after the fact.

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