What is the Home Ownership and Equity Protection Act (HOEPA)?

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The world of home financing unfortunately contains lenders who engage in predatory or deceptive practices that can mislead or harm homebuyers. This is where the Home Ownership and Equity Protection Act (HOEPA) comes in. It’s a piece of federal legislation that aims to protect consumers and prevent abusive lending practices by requiring clear disclosures and pre-loan counseling for certain types of mortgages, refinances and home equity loans/lines of credit.

Read on to learn your rights under HOEPA.

What is HOEPA?

The Home Ownership and Equity Protection Act (HOEPA) is a 1994 amendment to the Truth in Lending Act (TILA) that protects consumers from predatory mortgage lending. Expanded significantly in 2010, the law requires mortgage lenders to provide borrowers of “high-cost mortgages” (see below) with disclosures about how much the loan will cost over its lifetime and the consequences of default. In addition, HOEPA requires that borrowers undergo pre-loan counseling and restricts fees and penalties.

Historically, borrowers with poor credit are offered significantly more expensive loans. HOEPA seeks to ensure that borrowers who take out high-cost loans have a clear understanding of the terms.

What changes did the Dodd-Frank Act make to HOEPA?

The Dodd-Frank Wall Street Reform and Consumer Protection Act brought significant changes to the Home Ownership and Equity Protection Act. When originally enacted in 1994, HOEPA applied primarily to refinances and closed-end home equity loans. Under Dodd-Frank, the scope of loans under HOEPA’s purview widened to include home purchase loans and home equity lines of credit (HELOCs). The Act also introduced new thresholds based on prepayment penalties to identify high-cost mortgages and lowered the existing thresholds for loan rates and points and fees. These changes resulted in more loans being categorized as high-cost mortgages.

The Act also imposed restrictions on high-cost mortgages, such as the prohibition of balloon payments, and required that borrowers receive counseling (a provision expanded in 2013 to encourage consumers to obtain homeownership counseling for other types of loans).

Which mortgage types does HOEPA cover?

HOEPA generally covers the following loan types (primary residences):

It doesn’t typically apply to:

• Reverse mortgage
• Construction loan (specifically construction-only financing; it does apply to construction-to-permanent loans or end loans)

What classifies as a high-cost mortgage?

A high-cost mortgage, defined by HOEPA as “any consumer credit transaction that is secured by the consumer’s principal dwelling,” is one in which the annual percentage rate (APR) exceeds the average prime offer rate for a comparable transaction by more than 6.5 percentage points for a first-lien loan (a primary mortgage or refi of a primary mortgage) or 8.5 percentage points for a subordinate lien (like a home equity loan). If the associated points and fees are also above a certain threshold — generally, 5 percent of the loan amount — it’s also often considered a high-cost mortgage. The Consumer Financial Protection Bureau Bureau revises the minimum limit for the total points and fees annually, based on the current Consumer Price Index (CPI).

The presence or absence of certain other features can also determine a mortgage’s status as high-cost. The law does not allow high-cost mortgages to charge prepayment penalties or balloon payments, for example.

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 full amount being borrowed. Borrowers in high-cost mortgages also have enhanced remedies for violations of the law.

HOEPA rules and regulations

There are several provisions within HOEPA, including:

• Assessing a borrower’s ability to repay: Before issuing a high-cost mortgage, the mortgage lender must thoroughly review the borrower’s finances, including credit history, income, assets and debt.
• Restrictions on terms: The law restricts balloon payments and due-on-sale clauses in most circumstances, and lenders can’t charge a prepayment penalty. There are also limitations on late fees and some other restrictions.
• Disclosures: At least three days prior to closing of the high-cost mortgage, the lender must provide a written disclosure to the borrower that explains loan details including annual percentage rate (APR) and monthly payment, as well as the consequences of default.
• Counseling: Prior to closing, the borrower must receive approved homeownership counseling that covers the disclosures as well as budgeting and affordability.

Other borrower protections that apply to high-cost mortgages

Regulation Z, a component of TILA (although sometimes the two are referred to interchangeably), mandates that mortgage lenders provide disclosures before issuing loans. It requires that borrowers receive one breakdown of costs and expenses when applying for a loan and a second, finalized listing at least three days before closing. This practice allows the borrower to compare the final terms of the closing disclosure to the initial loan estimate.

Regulation Z also prohibits lenders from receiving compensation for committing the borrower to a specific type of loan, or from steering borrowers into a mortgage that results in more compensation for the loan officer, unless doing so is in the borrower’s best interest.