Protections for High-Cost Mortgages

HOEPA imposes additional requirements on lenders and gives consumers specific remedies for violations.

Updated by , Attorney · University of Denver Sturm College of Law

The Home Ownership and Equity Protection Act (HOEPA) is a federal law. The goal of HOEPA is to stop abusive practices in refinances and closed-end home equity loans that have higher interest rates or high fees.

If you decide to take out a "high-cost mortgage," meaning the interest rate or fees exceed specific amounts, HOEPA provides you with protection against abusive lending practices. This law restricts loan terms and features.

It also provides enhanced remedies for violations in a private civil action.

What Is HOEPA?

HOEPA was enacted in 1994 as an amendment to the Truth in Lending Act (TILA).

Under HOEPA as originally passed, 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.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). This law 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, like HELOCs.

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.

How to Determine If a Mortgage Is a High-Cost Mortgage

Again, HOEPA provides certain protections for borrowers if they take out a high-cost mortgage. (12 C.F.R. § 1026.32). 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 exceeds a specific threshold.
  • The prepayment penalties the lender charges under the loan or credit agreement exceed a specific amount or can be charged after a certain time period.

APR Test

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 (like an RV, boat, or a manufactured home that's considered personal property), or
  • 8.5 percentage points for subordinate-lien transactions.

Points and Fees Test

A mortgage is also considered to be 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 $24,866 (2023), or
  • 8% of the total loan amount or $1,243, whichever is less, if the loan amount is less than $24,866. These figures are 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 isn't allowed.

Consumer Protections If the Mortgage Is a High-Cost Mortgage

If the lender offers you a high-cost mortgage, it:

  • must provide specific disclosures about, for example, the APR, the amount borrowed, and the monthly payment
  • can't utilize certain loan terms, like a balloon payment that's 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)
  • can't charge a fee for providing a payoff statement
  • may pay the fees for the counseling required under the law (but can't require the borrower to take out the mortgage as a condition of having the fees paid)
  • can't 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 don't 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.

Counseling Requirements

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. (12 C.F.R. § 1026.34).

Talk to a Lawyer

If your lender violated HOEPA, you might be entitled to monetary damages. For example, TILA's remedies in a civil action for a HOEPA violation can include a refund of the finance charges and fees paid, statutory damages, court costs, and attorneys' fees. To get more information about HOEPA or high-cost home loans, talk to a real estate attorney.

Also, be aware that additional steps are often required in the foreclosure of a high-cost home loan. To find out if your state has any laws that affect the foreclosure of a high-cost home loan, talk to a foreclosure lawyer.

Talk to a Foreclosure attorney.
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