HOEPA High Cost Mortgage Rules

The Home Ownership and Equity Protection Act (15 U.S.C. §1639, et seq.) regulates the origination of high-cost mortgages, which are loan options for subprime borrowers who are unable to qualify for mortgages in the prime market. Generally, subprime borrowers are those with blemished credit or without an established credit history. Since loans to subprime borrowers represent a greater default risk, lenders charge more for them. The additional earnings from higher lending fees and interest rates are intended to make up for the losses that lenders will experience if a subprime borrower is not able to maintain loan payments.

The CFPB is responsible for the implementation and enforcement of HOEPA.  HOEPA was adopted as an amendment to the Truth-in-Lending Act (TILA) and its implementing regulations, like the other TILA regulations, are known as Regulation Z

• Is secured by the borrower’s principal dwelling, and
• Meets at least one of the following thresholds:

• An APR threshold, which differs for first-lien and subordinate-lien mortgages
• A points and fees threshold, or
• A prepayment penalty threshold
• types of transactions that are subject to HOEPA today include:
  
  • Conventional loans
  • Non-conventional loans, including FHA loans and VA loans
  • Mortgages to purchase or construct a principal dwelling
  • Refinances secured by a principal dwelling, and
  • Open-end and closed-end home equity loans secured by a principal dwelling
  HOEPA does not apply to reverse mortgages, bridge loans that are used to finance the initial construction of a dwelling, and loans originated by a housing finance agency when the housing finance agency is the creditor. Although HOEPA covers FHA and VA loans, it does not apply to loans originated through the Department of Agriculture’s Rural Development Section 502 Direct Loan Program.
• 
  
• average prime offer rate is an annual percentage rate that reflects the average interest rates, loan fees, and loan terms for mortgages offered to well-qualified borrowers. The APOR is found online on the FFIEC website. Using the APOR as a benchmark, HOEPA’s APR threshold is triggered if:
  
• The transaction is one for a first-lien mortgage and the APR is more than 6.5 percentage points above the APOR for a comparable transaction
• The transaction is one for a subordinate-lien mortgage and the APR is more than 8.5 percentage points above the APOR for a comparable transaction
• The points and fees threshold for high-cost mortgages varies based on the amount of the loan, and adjustments to this amount are made annually, based on the Consumer Price Index. Effective January 1, 2017, this threshold is triggered if the points and fees for a transaction exceed:
  
• 5% of the total loan amount for loans of $20,579 or more, or
• The lesser of 8% of the total loan amount or $1,029 for loans of less than $20,579
• prepayment penalty threshold for high-cost mortgages is triggered if:
  
• The loan includes a prepayment penalty provision that is in force for more than 36 months after consummation, or
• The loan permits prepayment penalties that exceed 2% of the amount prepaid
• Which of the following is not one of the thresholds used to identify a high-cost loan under HOEPA?
1. Finance charge
2. Points and fees
3. APR
4. Prepayment penalty  

HOEPA and its implementing regulations include several disclosure requirements that are intended to alert consumers of the risks associated with high-cost mortgages. Loan originators must provide applicants with the following disclosure:

You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.

(12 C.F.R. §1026.32(c)(1))
This disclosure is due at least three business days prior to the consummation of a mortgage (15 U.S.C. §1639(b)(1)). The purpose of providing the disclosure prior to closing is to give loan applicants a three-day waiting period to consider whether it is best to proceed with the transaction. A borrower can waive the waiting period if he/she has determined that the extension of credit is immediately necessary to remedy a bona fide personal emergency (12 C.F.R.§1026.31(c)(1)(iii)).

 HOEPA include the following, which are intended to warn potential borrowers of specific loan terms that make high-cost mortgages a riskier and more expensive loan product:

• APR disclosure: creditors must disclose the annual percentage rate. For high-cost mortgages, the APR is typically higher than it would be for a prime loan (12 C.F.R. §1026.32(c)(2)).
• Notice of balloon payment: when balloon payments are not prohibited (e.g., they may be allowed for seasonal employees and in transactions for bridge loans), the lending agreement must state the existence of a balloon payment. The disclosure must also state the amount of the balloon payment (12 C.F.R. §1026.32(c)(3)).
• Notice regarding regular payments: for closed-end loans, creditors must disclose the amount of periodic payments based on the amount borrowed (12 C.F.R. §1026.32(c)(3)).
• Variable-rate disclosure: if the mortgage has an adjustable rate, the disclosure must include a statement that the monthly payment may increase, showing the maximum monthly payment, based on the maximum interest rate that may be required over the term of the loan (12 C.F.R. §1026.32(c)(4)).
• Amount borrowed: in transactions for closed-end loans, there must be a statement of the total amount borrowed, as shown on the face amount of the promissory note. This disclosure is accurate if it is no more than $100 above or below the amount that must be disclosed 
•  Notice to Assignee, which alerts assignees (those to whom a mortgage is assigned) and purchasers of mortgages that a loan is subject to HOEPA.  

What is the purpose of the Notice to Assignee required under HOEPA?

It alerts assignees and purchasers of mortgages that a loan is subject to HOEPA

It discloses the amount of periodic payments based on the amount borrowe

It alerts consumers of the risks associated with high-cost mortgage

It discloses the fact that the monthly payment may increase  

Under HOEPA, it is prohibited for a lender to:

Charge a late fee of 2% of the amount past due when a borrower submits a payment 25 days late

X Increase the interest rate if a borrower defaults on a payment

Make a variable-rate loan

Assess a borrower’s ability to repay a loan using reasonably reliable third-party records  

The statute of limitations for bringing an action for a violation of HOEPA is three years. This three-year period is measured from the date of the occurrence of a violation (15 U.S.C. §1640(e)).
In a successful action for violations of HOEPA, the civil liability provisions of TILA determine the damages that the plaintiff may recover. In individual actions, penalties may include:

• Actual damages
• A minimum recovery of $200 and a maximum of $2,000 for open-end loans
• A minimum recovery of $400 and a maximum of $4,000 for closed-end loans, and
• All finance charges and fees paid by the consumer
• 
  
• Which of the following requirements only applies to transactions for high-cost mortgages?
  1. X Requiring a borrower to complete pre-loan counseling
  2. Evaluating a borrower’s ability to repay a mortgage
  3. Verifying income, assets, and employment with reliable third-party documentation
  4. Completing underwriting for closed-end loans in compliance with the Ability to Repay Rule
  Correct. Pre-loan counseling is a requirement that only applies to high-cost mortgage loan transactions   One of the objectives of HOEPA is to address:
1. Discriminating against members of a protected class
2. Limiting credit opportunities for women
3. Reverse redlining
4. Identity theft  

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