Omar Bennett
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 refinancing and closed-end home equity loans with high interest rates or high fees. HOEPA covers high-cost mortgages, which are defined as loans with an annual percentage rate (APR) that exceeds the prime rate by a certain amount. A loan is considered high-cost if the transaction's APR exceeds the Average Prime Offer Rate (APOR) for comparable transactions on that date by more than a specified percentage, which varies depending on the type of loan and the value of the loan. HOEPA includes provisions such as assessing a borrower's ability to repay, restrictions on loan terms, and requirements for disclosures and pre-loan counseling.
| Characteristics | Values |
|---|---|
| Year of enactment | 1994 |
| Type of enactment | Amendment to the Truth in Lending Act (TILA) |
| Purpose | To address abusive practices in refinancing and closed-end home equity loans with high interest rates or high fees |
| Type of loans covered | Closed-end refinance, home-equity, and home-improvement loans with high APRs and/or high points and fees |
| Loans exempted | Residential mortgage transactions, reverse mortgages, construction loans, open-end, home-secured credit transactions (e.g. HELOCs) |
| Requirements for high-cost mortgages | Special disclosures, restrictions on loan terms, enhanced remedies for violations, mandatory pre-loan counseling |
| Restrictions on lenders | Cannot encourage borrowers to default on existing loans, cannot charge fees for modifying or extending high-cost mortgages, late fees limited to 4% of the overdue payment, fees for payoff statements generally banned |
| Definition of high-cost mortgage | Loans with an annual percentage rate (APR) that exceeds the Average Prime Offer Rate (APOR) by more than a specified amount (e.g. 8.5 percentage points for first-lien loans less than $50,000) |
| Considerations for lenders | Review fee structure, prepayment penalty provisions, ensure compliance with HOEPA requirements, avoid structuring loans to evade HOEPA coverage |
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What You'll Learn
High-cost mortgage loans
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 refinancing and closed-end home equity loans with high interest rates or high fees. HOEPA created a regulatory category for residential loans known as high-cost mortgages, based on the loan's annual percentage rate (APR) and/or its points and fees.
A high-cost mortgage loan is a consumer credit transaction secured by the consumer's principal dwelling, with an APR that exceeds the Average Prime Offer Rate (APOR) by a given amount. The APR threshold for a high-cost mortgage has been lowered, so more loans will qualify. The specific criteria for a high-cost mortgage include:
- The APR exceeds the APOR by more than 6.5%.
- The total lender/broker points and fees exceed 5% of the total loan amount. This includes but is not limited to origination fees, broker fees, processing fees, underwriting fees, and document preparation fees.
- The loan has a prepayment penalty beyond 36 months from closing or the prepayment penalty exceeds 2% of the amount prepaid.
High-cost mortgages have stricter requirements than higher-priced mortgages. For instance, high-cost mortgages must meet the same three requirements that pertain to higher-priced mortgages, but additional conditions apply, such as no balloon payments being allowed, the creditor cannot recommend default, and the maximum allowed late fee is 4% of the past-due payment.
When a mortgage is classified as high-cost, lenders must meet specific requirements, including providing specifically worded disclosures about when the loan becomes effective and the consequences of defaulting. Lenders must also clearly disclose all loan terms, such as the APR, monthly payments, and the full amount being borrowed.
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Annual percentage rate (APR)
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 refinancing and closed-end home equity loans with high interest rates or high fees. HOEPA covers high-cost mortgages, which are defined as loans with an annual percentage rate (APR) that exceeds a certain threshold. The APR threshold for a high-cost mortgage has been lowered in recent years, so more loans will qualify.
The APR is the cost of borrowing money, including any fees, expressed as a yearly rate. It is important to consider the APR when taking out a loan, as it gives a more accurate representation of the cost of borrowing than the interest rate alone. The APR takes into account not only the interest rate but also any additional fees and charges associated with the loan. This makes it a useful tool for comparing the cost of different loan options.
The APR for a loan is typically calculated by adding the interest rate and any other fees or charges associated with the loan, such as origination fees, discount points, and closing costs. This calculation can vary depending on the specific loan product and the lender, so it is important to review the terms and conditions of a loan carefully before making a decision.
In the context of HOEPA, the APR is used to determine whether a loan is considered high-cost. This comparison involves looking at the difference between the loan's APR and the Average Prime Offer Rate (APOR) for comparable transactions. If the loan's APR exceeds the APOR by a certain amount, it is considered a high-cost mortgage and is subject to the provisions of HOEPA. The specific threshold for the APR to be considered high-cost depends on the specifics of the loan, such as the loan amount and whether it is secured by personal property.
Lenders are required to provide specific disclosures and comply with restrictions on loan terms for loans that meet the criteria for high-cost mortgages under HOEPA. These disclosures include information about the APR, monthly payments, and the full amount being borrowed. Borrowers in high-cost mortgages also have enhanced remedies available to them in the event of violations of the law by lenders.
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Points and fees
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 refinancing and closed-end home equity loans with high interest rates or high fees. The HOEPA restricted loan features on these mortgages, required disclosures to the applicant, and provided enhanced remedies to borrowers for violations in a civil action.
HOEPA mainly covers high-cost mortgages, which are defined as loans with an annual percentage rate (APR) that exceeds the prime rate by a certain amount. HOEPA includes provisions such as assessing a borrower's ability to repay, restrictions on loan terms, and requirements for disclosures and pre-loan counselling.
The HOEPA points-and-fees threshold is the lesser of 8% of the total loan amount or $1,000. If the total loan amount for a transaction is $26,092 or more, and the points-and-fees amount exceeds 5% of the total loan amount, the transaction is a high-cost mortgage. If the total loan amount for a transaction is less than $26,092, and the points-and-fees amount exceeds the lesser of the adjusted points-and-fees dollar trigger of $1,305 or 8% of the total loan amount, the transaction is a high-cost mortgage.
The following items are included in calculating points and fees for HOEPA coverage: compensation can be paid by the creditor to a mortgage broker, by the consumer or creditor to a manufactured home retailer, or included in the sales price of a manufactured home. Premiums for credit insurance, credit property insurance, other life, accident, health, or loss-of-income insurance where the creditor is the beneficiary.
There are certain fees that are banned or limited for high-cost mortgages. Lenders are not allowed to charge fees for paying off the loan early, charge late fees of more than 4% of the monthly payment, or charge a fee for receiving a payoff statement. Fees for the generation of payoff statements are generally banned, with limited exceptions. Points and fees cannot be financed, excluding finance closing charges.
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Reverse mortgages
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 refinancing and closed-end home equity loans with high interest rates or high fees. HOEPA covers high-cost mortgages, which are defined as loans with an annual percentage rate (APR) that exceeds the prime rate by a certain amount.
However, it is important to note that reverse mortgages can still be high-cost loans. While they may not be subject to the same disclosure requirements and restrictions under HOEPA, borrowers should be aware of the potential costs and risks associated with these loans. Reverse mortgages typically come with higher interest rates and fees than traditional mortgages, and the interest compounds over time, increasing the overall cost of the loan.
To protect borrowers, there are specific regulations and guidelines in place for reverse mortgages, such as mandatory counselling sessions to ensure borrowers understand the terms and potential risks of the loan. Additionally, lenders offering reverse mortgages must follow certain lending practices, including assessing the borrower's ability to repay the loan and providing clear disclosures about the loan terms and costs. These protections aim to prevent predatory lending practices and ensure that borrowers are making informed decisions when taking out a reverse mortgage.
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Loan terms
The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to the Truth in Lending Act (TILA). The act addressed abusive practices in refinancing and closed-end home equity loans with high interest rates or high fees. HOEPA covers high-cost mortgages, which are defined as loans with an annual percentage rate (APR) that exceeds the prime rate by a certain amount.
HOEPA places restrictions on loan terms, requiring disclosures about how much the loan will cost over its lifetime and the consequences of default. Lenders must disclose all loan terms, such as the APR, monthly payments, and the full amount being borrowed. The act also prohibits certain practices, such as charging fees for early repayment and encouraging consumers to default on their existing loans.
HOEPA's restrictions on loan terms include:
- Lenders cannot charge a fee to modify, defer, renew, extend, or amend a high-cost mortgage.
- Late fees cannot exceed 4% of the overdue payment and cannot be imposed more than once for a single late payment.
- Fees for the generation of payoff statements are generally banned, with limited exceptions.
- Balloon payments are generally prohibited unless certain criteria are met, such as lenders operating in rural or underserved areas.
- Lenders cannot purposely structure a transaction to evade HOEPA coverage, such as splitting a loan into two loans to divide the loan fees and avoid the points and fees threshold.
- An increase in the interest rate after default.
- Acceleration as a result of default in payment, with a refund of interest calculated in a manner less favourable to the consumer than the actuarial method.
- Creditors must provide a list of homeownership counselling organizations within three days of application and confirm that the consumer received counselling.
HOEPA also requires an assessment of the borrower's ability to repay and provides for pre-loan counselling. The act was expanded in 2010 to include purchase-money mortgages and open-end, dwelling-secured credit transactions such as HELOCs. Reverse mortgages and construction loans remain exempt.
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Frequently asked questions
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 refinancing and closed-end home equity loans with high interest rates or high fees.
HOEPA mainly covers high-cost mortgages, which are defined as loans with an annual percentage rate (APR) that exceeds the prime rate by a certain amount. 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 by more than 8.5 percentage points for first-lien that are for less than $50,000 and are secured by personal property.
When a mortgage is classified as high-cost, there are certain requirements that lenders must meet, including specifically-worded disclosures about when the loan becomes effective and the consequences of defaulting. Lenders must also clearly disclose all loan terms such as the APR, monthly payments, and the full amount being borrowed.
