What Mortgage Lenders Should Know About HOEPA Compliance?

What is HOEPA? A HOEPA Loan, or the Home Ownership and Equity Protection Act, was enacted in 1994 to outlaw abusive lending practices in the mortgage business. HOEPA gives borrowers protection for mortgages with high annual percentage rates (APRs) or usually high points and fees.

HOEPA Regulations were amended by the Dodd-Frank Act to boost its protection and provide mortgage borrowers with additional security. The other safeguards include:

• Loans covered by HOEPA include both open-ended home-secured credit transactions (for home equity lines of credit) and home-purchase loans, which were not covered until amended.
• A new threshold was added for high-cost mortgages based on the prepayment penalties.
• Existing HOEPA Requirements, including thresholds based on a loan's rate, points, and fees, were reduced, so more loans were considered high-cost mortgages

Additional restrictions were placed on high-cost mortgages, including the prohibition of "balloon" payments regardless of the loan term

Some but not all of the loans covered under HOEPA compliance requirements include -

• Housing refinance loans
• Purchase-money house loans/mortgages
• Close-ended home equity loans
• Open-ended credit plans such as Home Equity Line of Credit (HELOCs)

What Are HOEPA Requirements?

So only high-cost mortgages are covered by HOEPA, right? Right! But what exactly is a High-Cost Mortgage?

A loan is branded "high-cost" if its Annual Percentage Rate (APR) exceeds the Average Prime Offer Rate (APOR). This is determined for a mortgage loan that:

• Exceeds 6.5 points for any first mortgage loan
• 5 points for first mortgage less than $50,000 and secured by personal property
• 5 points for any second mortgage

If a loan meets all these criteria, the lender must provide several disclosures to the borrowers at least three days before mortgage closing. This includes:

• Written notice stating that the loan is not finalized, even if the application is signed. Borrowers get an additional three days to decide if they want to finalize the deal.
• Written notice warning the borrower that the lender has a mortgage on the home, and the borrower is liable to lose their home unless the payments are made on time.

The lender must also disclose the following:

• The APR documentation
• Regular payable amount
• Total loan amount
• If a variable loan, the lender must disclose the exact rate and monthly payments
• Maximum monthly payments

There are restrictions on prepayment penalties as well. They are prohibited if:

• More than 36 months after consumption or account opening
• In an amount more than 2 percent of amount prepaid

Everything Mortgage Lenders Should Know About HOEPA. Why HOEPA?

So we've established what HOEPA is, but why does it exist? Well, in the bad old days of the mortgage loan "wild west," there were fewer restrictions on lenders when it came to loan terms. Fees and charges were sometimes hidden in the loan documents. Borrowers were encouraged to get loans that were beyond their ability to make payments. So HOEPA, specifically Section 32, was created to reign in those inequities.

Lenders may not structure a home-secured loan as an open-end plan to evade Section 32

May not:

• Impose, with limited exceptions, a balloon payment on loans with a term of fewer than five years
• Balloon exception for "bridge loans of 12 months or less", or certain rural and underserved or small creditor loans designated under 1026.43 (f) and (e)(6)
• Impose negative amortization
• Collect advance payments, i.e., the consolidation and collection of more than two periodic payments, paid in advance from the loan proceeds; increase an interest rate upon default
• Include, with limited exception, a due-on-demand clause
• Unfairly calculate interest due to being rebated to a consumer in connection with loan acceleration resulting from default
• Make, with little exception, direct payment of loan proceeds to a home improvement contractor, payable solely in the name of the contractor
• Fail to furnish the required regulation z notice to an assignee of a high-cost mortgage (informs the assignee this mortgage is subject to special tila protections and the assignee could be liable for claims and defenses the consumer could assert against the lender)
• Refinance a high-cost mortgage made by the same lender into another high-cost mortgage to the same homeowner within one year of consummation unless the refinance

Failure on the part of a lender to follow the guidelines outlined in HOEPA may result in civil penalties and fines of 3 times the original loan amount.

Know The Rules. Everything Mortgage Lenders Should Know About HOEPA.

Having this information available when shopping for mortgages gives you more ammunition for the entire loan process. Home buying, with all of the modern improvements and modifications, is NOT the "wild west" anymore. But it's still a daunting journey, and this preparation can serve you well.