If you decide to take out a high-cost mortgage (a mortgage where the interest rate or fees exceed certain amounts), the Home Ownership and Equity Protection Act (HOEPA) provides you with certain protections. And, starting on January 10, 2014, those protections will be expanded. Read on to learn more about HOEPA and the new protections for borrowers considering getting this type of mortgage.
Home Ownership and Equity Protection Act (HOEPA)
The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to the Truth in Lending Act (TILA). The goal of HOEPA was to stop abusive practices in refinances and closed-end home equity loans that had high interest rates or high fees. Under HOEPA, if a refinance or home equity mortgage loan met any of HOEPA’s high-cost coverage tests, the lender was required to provide special disclosures to borrowers and was subject to various restrictions on the loan terms.
Dodd-Frank Wall Street Reform and Consumer Protection Act Expands HOEPA
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which amended TILA by expanding the coverage of HOEPA to include purchase-money mortgages (the mortgage you used to buy your home) and open-end credit plans (such as HELOCs).
Consumer Financial Protection Bureau
Additionally, the Dodd-Frank Act gave the Consumer Financial Protection Bureau (CFPB) the authority to adopt new rules to implement the new changes to HOEPA. In January 2013, the CFPB issued a new rule (referred to as the “2013 HOEPA Rule”), which pertains to high-cost mortgages and counseling requirements.
How to Determine If a Mortgage Is a High-Cost Mortgage
HOEPA provides certain protections for borrowers if they take out a high-cost mortgage. A loan is considered high-cost if the borrower's principal dwelling secures the loan and one of the following is true:
- The loan’s annual percentage rate (APR) exceeds a certain threshold.
- The amount of points and fees paid in connection with the transaction exceed a certain threshold.
- The prepayment penalties the lender charges under the loan or credit agreement exceed a certain amount or can be charged after a certain time period.
You can determine if a transaction is a high-cost mortgage based on its APR. A loan is considered a high-cost mortgage if its APR as of the date the interest rate is set exceeds the Average Prime Offer Rate (an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms) for a comparable transaction on that date by more than:
- 6.5 percentage points for first-mortgage transactions, generally
- 8.5 percentage points for first-mortgage transactions, if less than $50,000 and secured by personal property (such as a RV, boat, or a manufactured home this is considered personal property), or
- 8.5 percentage points for subordinate-lien transactions. (Learn more about lien priority.)
Points and Fees Test
A mortgage is also considered to a high-cost mortgage if its points and fees exceed:
- 5% of the total loan amount (if the loan amount is equal to or more than $20,000), or
- 8% of the total loan amount or $1,000 (whichever is less) if the loan amount is less than $20,000. (These figures will be adjusted annually.)
Prepayment Penalty Test
A transaction is a high-cost mortgage if there is a prepayment penalty:
- more than 36 months after the loan is taken out, or
- in an amount that exceeds 2% of the amount prepaid.
(If the loan is indeed a high-cost mortgage, a prepayment penalty is not allowed.)
Consumer Protections If the Mortgage Is a High-Cost Mortgage
If the lender offers you a high-cost mortgage, it (among other things):
- must provide specific disclosures (such as the APR, amount borrowed, and monthly payment)
- cannot utilize certain loan terms (such as balloon payments that are more than twice the regular payment amounts – except in special circumstances)
- is subject to restrictions on fees and practices (for example, late fees are limited to 4% of the past due payment)
- cannot charge a fee for providing a payoff statement (a statement of the amount due to pay off the outstanding balance of a high-cost mortgage)
- may pay the fees for the counseling required under the law (but cannot require the borrower to take out the mortgage as a condition of having the fees paid)
- cannot charge fees for loan modifications, and
- may not recommend or encourage default on an existing loan in connection with opening a high-cost mortgage that refinances all or any portion of the existing loan.
Transactions That Are Exempt from High-Cost Mortgage Protections
These protections do not apply if:
- you take out a reverse mortgage
- you borrow money to finance the construction of a new home
- you get the loan from a Housing Finance Agency (where the Housing Finance Agency is the creditor), or
- you take out a loan under the United States Department of Agriculture’s Rural Housing Service section 502 Direct Loan Program.
Before providing a high-cost mortgage, a lender must ensure that the borrower receives counseling on the advisability of such a mortgage from a HUD-approved counselor or a state housing finance authority.
In addition to the pre-loan counseling requirement for high-cost mortgages, the 2013 HOEPA Rule implements two additional Dodd-Frank provisions related to homeownership counseling.
- First-time borrowers must receive homeownership counseling before taking out a negative amortization loan.
- The lender must provide a list of counseling organizations to any consumer applying for a federally related mortgage loan within three business days after receiving the consumer’s application.
Effective Date of the New Rule
The new rule goes into effect on January 10, 2014.
For More Information
To learn more about the new rule, go to the CFPB’s website at www.consumerfinance.gov/regulations and click on “High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X).”