The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to the Truth in Lending Act (TILA) to address abusive practices in refinances and closed-end home equity loans with high interest rates or high fees. Since HOEPA’s enactment, refinances or home equity mortgage loans meeting any of HOEPA’s high-cost coverage tests have been subject to special disclosure requirements and restrictions on loan terms, and consumers with high-cost mortgages have had enhanced remedies for violations of the law. The 2013 HOEPA Rule also implements two additional Dodd-Frank counseling requirements that may apply to creditors regardless of whether or not they make high-cost mortgages. Specifically, these provisions require or encourage consumers to obtain homeownership counseling for other types of loans. Users of this guide should keep in mind that these homeownership counseling-related requirements are not amendments to HOEPA, but are separate amendments to the Real Estate Settlement Procedures Act’s (RESPA’s) Regulation X and the Truth in Lending Act’s (TILA’s) Regulation Z that apply to different types of transactions.
The 2013 HOEPA Rule applies to loan applications received on or after January 10, 2014. To comply with high-cost mortgage provisions of this rule you must:
- Give additional disclosures
- Avoid certain loan terms
- Ensure the consumer receives additional protections including homeownership counseling
Creditors must provide a list of homeownership counseling organizations within 3 days of application, and confirm that the consumer received homeownership counseling.
Loans Subject to HOEPA Coverage
- Purchase-money mortgages
- Closed-end home equity loans
- Open-end credit plans (i.e. HELOCs)
Loans Exempt from HOEPA Coverage
- Reverse mortgages
- Construction Loans (applies to only the initial construction of a new dwelling)
- Loans originated and directly financed by Housing Finance Agency (HFA)
- Loans originated under the U.S. Department of Agriculture (USDA’s) Rural Development Loan Program
- Mortgages secured by vacation or second homes
How to Determine if a Loan is Considered a “High-Cost Mortgage”
A loan is considered high-cost if the transaction’s annual percentage rate (APR) exceeds the Average Prime Offer Rate (APOR) for comparable transactions on that date more than:
- 6.5 percentage points for first-lien transaction
- 8.5 percentage points for first-lien that are for less than $50,000 & secured by personal property (i.e. houseboat, RVs)
- 8.5 percentage points for junior-lien transactions
A loan is also determined to be high-cost by the amount of points & fees paid within the transaction, or by its prepayment penalties. The APOR is published at ffiec.gov/ratespread.
Calculating APR for HOEPA Coverage
Fix-rate transactions calculate the APR by using the rate in effect on the date you set the interest rate for the transaction. Variable-rate use the greater of the introductory interest rate or fully-index rate. Interest rates that may or will vary other than in accordance with an index (i.e. step-rate loan) use the maximum rate that the applicant may pay during the term of the transaction.
How to Determine Point and Fee Coverage
5 percent of the total loan amount for a loan greater than or equal to $20,000. 8 percent of the total loan amount or $1,000 (whichever is less) for loan amounts less than $20,000. The following items are included in calculating points and fees for HOEPA coverage:
- Closed-end credit transactions
- Open-end credit plans (HELOCs)
- Participating fees payable at or before account opening
- Fees charged to draw on their HELOCs
- Point and fees calculation
- Finance charge
Loan Originator Compensation and Comments
Compensation can be paid by creditor to a mortgage broker, by consumer or creditor to a manufactured home retailer, or included in the sales price of a manufactured home through:
- Real estate-related fees
- Premiums for credit insurance; credit property insurance; other life, accident, health or loss-of-income insurance where the creditor is beneficiary
- Maximum prepayment penalty
- Prepayment penalty paid in a refinance
HOEPA Rules Regulating Prepayment Penalties
HOEPA prohibits prepayment penalties for high-cost mortgages. Added prepayment penalty coverage test:
- More than 36 months after consumption or account opening
- In an amount more than 2 percent of amount prepaid
Restrictions on and Additional Consumer Protections for High-Cost Mortgages
Specific disclosure requirements include:
- Disclosures must inform the consumer that the loan will not be effective until consummation or account opening occurs
- Explain the consequences of default
- Disclose loan terms such as APR, amount borrows and monthly payment
- If a variable-rate loan, explain the maximum monthly payment that may be required under the terms of the loan or credit plan
Requirements include ability-to-repay and pre-loan counseling. Restrictions apply to transaction terms, fees and practices.
Restrictions on Loan Terms for High-Cost Mortgages
- Balloon payments
- Prepayment penalties
- Due-on-demand features
Other Acts or Practices Prohibited or Restricted for High-Cost Mortgages
Creditors and mortgage brokers are prohibited from recommending default on an existing loan to be refinanced by a high-cost mortgage. Creditors, servicers and assignees cannot charge a fee to modify, defer, renew, extend or amend a high-cost mortgage. Late fees are restricted to 4 percent of the past due payment and pyramiding pf late fees is prohibited. Fees for generation of payoff statements are generally banned, with limited exceptions. Points and fees cannot be financed, excluding finance closing charges. Cannot purposely structure a transaction to evade HOEPA coverage (i.e. splitting a loan into 2 loans to divide the loan fees to avoid the points and fees threshold).
Existing HOEPA and Regulation Z Protections Which Still Apply to High-Cost Mortgages
- Negative amortization
- A payment schedule that consolidates more than 2 periodic payments and pays them in advance from the loan proceeds.
- An increase in the interest rate after default.
- Acceleration as a result of default in payment, a refund of interest calculated in the manner less favorable to the consumer than the actuarial method.
- Paying a contractor under a home-improvement contract from the proceeds of a high-cost mortgage.
- Selling a high-cost mortgage in the secondary market without providing high-cost mortgage notice to assignee.
- Refinancing any high-cost mortgage into another high-cost mortgage within 1 year after having extended credit, unless the refinancing is in the consumers’ interest.
New Ability-to-Repay Requirements for High-Cost Mortgages
- Closed-end credit transactions have same ability-to-repay requirements found under consumerfinance.gov
- Open-end high-cost mortgages (HELOCs) and comments
Counseling Requirements for High-Cost Mortgages
Lender must receive written certification that the consumer has received homeownership counseling from an agency on the HUD-approved housing counseling list found at consumerfinance.gov. The homeownership counselor cannot be affiliated with or employed by the lender. Lenders cannot steer the consumer to a particular counseling agency. Lender must provide applicants a written list of 10 homeownership counseling organizations that are closest to the center of the zip code of the borrowers’ current address within 3 business days of receiving application. The homeowner counseling organization list must contain:
- Agency name
- Phone number
- Street address
- Zip Code
- Website URL
- Email address
- Counseling services provided
- Languages spoken
- The following disclosure: “The counseling agencies on this list are approved by the U.S. Department of Housing and Urban Development (HUD), and they can offer independent advice about whether a particular set of mortgage loan terms is a good fit based on your objectives and circumstances, often at little or no cost to you. This list shows you several approved agencies in your area. You can find other approved counseling agencies at the Consumer Financial Protection Bureau’s (CFPB) website: www.consumerfinance.gov/mortgagehelp or by calling 1-855-411-CFPB (2372). You can also access a list of nationwide HUD-approved counseling intermediaries at: portal.hud.gov/hudportal/HUD.
Counseling cannot begin until the consumer has received their RESPA loan estimate or the disclosures required, which will be verified with the counselor. High-cost mortgage disclosures are required to be provided at least 3 business days before closing. Counseling may be provided via telephone. Written certificate may be sent by counselor via mail, email or facsimile so long as the certificate is in retainable form.
Fees for Homeownership Counseling for High-Cost Mortgages
Lenders may pay the counseling fee, but cannot condition payment on the consumer getting a high-cost loan. Consumers may also pay the counseling fee.