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Using Spread Locks and Fixed Rate Locks

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This article covers how to use either the spread lock or rate lock option when pricing a loan with a Fixed rate.

Spread Locks

When you click into Rate field on the Opportunity Screen, you'll see a comment about the final rate being set at closing. This comment helps explain when and how the final rate will be determined. By default, PrecisionLender assumes that the customer will bear all interest rate risk until the Opportunity is closed, and uses a rate that is Spread Locked. In the example below, the rate will be set at closing to the 5-Year FHLB-Composite + a spread of 2.193%.  If the deal were to close today, the Rate field tells us that the rate would be 5.2% in this example.

Rate with spread lock will be set at closing at your spread plus the funding curve rate.

Rate Locks

If you prefer to have the bank assume all risk until closing, you can click next to the Rate Field to open a popup and switch from Spread Locked in order to "lock" the quoted rate in until the desired time has passed. Switching to a fixed rate lock adds more interest rate risk to the opportunity, so expect to see a negative impact to your return. Available rate lock periods are set at the product level.

Set spread lock in field to right of Rate field

 

Once you select a lock period, if you click into the Rate field again, you'll see that the Spread Lock message has been replaced with a notice that the rate has been locked for a period of time.

Spread lock will update message with the date your rate will be locked until

 

Funding Curve Family/Index

The Funding Curve Family being used for the rate spread lock is shown on the second line from the top of the Spread Lock or Rate Lock popup.

Funding curve family shown in spread lock popup

Depending on the Index used to price Fixed Rate deals, the index maturity will adjust to the nearest point on that index's curve if the maturity is updated. Depending on the maturity entered, the index maturity may not update every time the maturity changes. For example, if you price a loan with a 60 month maturity and the Fixed rate index is set to Libor, the Libor 5-year rate will be used for calculating the initial rate. If you change the maturity to 120 months, then the index will update to the Libor 10-year rate and use that rate to calculate the initial rate.

Note that Administrators set the Funding Curve Family for the rate spread lock in the Region Edit section, and can set a Fixed Rate Spread Lock Funding Curve Family that differs from the regional setting, if needed for certain product types, in the Commercial Loan Product setup screen.

 

Rate

The Rate will equal the total of the index rate + the spread. Once the initial rate is set, any change to the index, whether by updating the maturity or pricing date, will result in a change in the spread in order to maintain the initial rate. If desiring to maintain the same spread, and have the initial rate change, the spread will need to be re-entered in the Spread Over field.

You can also check the box to use the Rate as the floor in this opportunity. This is for notational purposes only, as a fixed rate loan will not have rate changes after the opportunity closes.

 

 

 

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