Short answer: loans get packaged into bonds. Bonds get sold at auction, and the market prices them according to their risk relative to treasury bonds. Banks do

Short answer: loans get packaged into bonds. Bonds get sold at auction, and the market prices them according to their risk relative to treasury bonds. Banks don't have to follow the federal rate. It's the "zero risk" rate that anyone can get. Beyond that, higher return generally means higher risk, with the risk premium set by the market. If you originate a loan with a wildly low APR, then you'll certainly get borrowers, but nobody will buy the debt from you, and you'll lose money. If you try to originate mortgages with higher than market APR, you won't have any takers.