Dealing with your mortgage likely always feels high stakes. The last thing you want is to jeopardize your home. Luckily, the Home Ownership and Equity Protection Act (HOEPA) protects Americans against abusive lending practices. This article will summarize these regulations and provide you with a clear understanding of what protections HOEPA offers.
Written by Todd Carney, J.D. Harvard Law 2021.
Updated October 12, 2021
Dealing with your mortgage likely always feels high stakes. The last thing you want is to jeopardize your home. Luckily, the Home Ownership and Equity Protection Act (HOEPA) protects Americans against abusive lending practices. The law restricts loan terms to prevent lenders from charging excessive fees and rates to mortgage borrowers. Given the complex nature of mortgages, the regulations around them are not exactly simple. This article will summarize these regulations and provide you with a clear understanding of what protections HOEPA offers.
What Is the Home Ownership and Equity Protection Act?
In 1994, Congress passed HOEPA as an amendment to the Truth In Lending Act (TILA), which is also known as Regulation Z. The goal of the law was to end abusive refinancing practices and address closed-end home equity loans that had high interest rates and fees. A closed-end home equity loan is a loan that severely restricts the borrower’s ability to prepay, renegotiate. or refinance their home loan.
HOEPA originally used a high-cost coverage test to evaluate and determine whether refinances and home equity loans are considered high cost. When they were, lenders were required to give borrowers special HOEPA disclosures and these loan terms included certain restrictions.
Expansions Under the Dodd-Frank Act
In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This new legislation amended TILA and expanded HOEPA’s coverage to include purchase-money mortgages, which are mortgage loans that are used to buy a home. Dodd-Frank also increased HOEPA coverage to include open-end credit plans. The best-known example of an open-end credit plan is a home equity line of credit (HELOC).
A HELOC is when someone takes out a line of credit and their home equity serves as the collateral. When someone has a HELOC, they continue to pay their mortgage while also paying back what they borrowed through the HELOC. This can be risky since having an additional payment on top of a mortgage loan can be overwhelming if you’re already struggling with your finances.
Additionally, the Dodd-Frank Act gave the Consumer Financial Protection Bureau (CFPB) the authority to create new regulations to change HOEPA. With this power, the CFPB created the 2013 HOEPA Rule, which covers high-cost mortgages and counseling requirements. The counseling covers topics such as the important terms and phrases related to the mortgage, what kind of budget the consumer has, and if the borrower can afford the mortgage.
Ultimately, all regulations concerning HOEPA are listed in 12 CFR 1026 and 12 CFR 1024. The CFPB has issued final rules on HOEPA by amending these two regulations.
What Does HOEPA Consider a High-Cost Mortgage?
Only homes used for the borrower’s primary residence are covered by the Home Ownership and Equity Protection Act. So, for a mortgage to be protected by HOEPA’s high-cost mortgage protections, the borrower’s “principal dwelling” must be used to secure the loan. The mortgage must also meet at least one of these three other conditions:
The loan has a high APR.
A mortgage may be considered high cost if the loan’s annual percentage rate (APR) is higher than the Average Prime Offer Rate (APOR) for a comparable transaction on the date the interest rate is set. For the mortgage to be considered high cost, the APR of the mortgage must be larger than the APOR by more than:
6.5 percentage points for the first mortgage loan (aka first lien) on your house;
8.5 percentage points for a first mortgage that is under $50,000 and is secured by personal property (this typically includes items such as a boat, a trailer, or an RV); or
8.5 percentage points for second mortgages.
The loan has high points or fees.
A mortgage will be considered high cost if the points and fees that are paid with the transaction exceed a certain fee threshold once the mortgage becomes binding. This is also called the consummation of the loan. The fee threshold is adjusted annually. In 2021, it was set to $22,052. For a mortgage to be considered high cost, the fees for the transaction must exceed:
5% of the overall loan, if the total loan amount is equal to or greater than $22,052; or
8% of the overall loan or $1,103 (whichever is less), if the total loan amount is less than $22,052 upon consummation.
The loan has a prepayment penalty.
A mortgage can be considered high cost if the lender charges a prepayment penalty in the loan agreement and
The prepayment penalty is in effect more than 36 months after loan consummation; or
The prepayment penalties are greater than 2% of the sum that the borrower paid early.
It is important to note the lender cannot enact a prepayment penalty if the mortgage qualifies as a high-cost mortgage.
Protections Provided by HOEPA
If the lender’s loan qualifies as a high-cost mortgage, then they must abide by several provisions. First, the lender has to provide specific disclosures to the borrower, such as ones specific to the APR, monthly payment, and the amount borrowed. These disclosures must be given three days or more prior to the start of the loan.
Second, the lender can’t use certain loan terms. Balloon payments are an example of one of these restricted loan terms. Balloon payments require borrowers to pay more than twice the regular amount of their payment. Since the law aims to prevent high costs on mortgages, this practice is prohibited. HOEPA does allow exceptions for small rural lenders, likely due to the scarcity of lenders in these areas.
Additionally, HOEPA requires that lenders abide by its restrictions on fees and practices. The law regulates bona fide discount points, which borrowers use to cut the interest rate. It also caps late fees to 4% of the past-due payment. Under HOEPA, lenders are also banned from charging a fee in exchange for a payoff statement.
Lenders are allowed to pay the fee for the counseling that HOEPA requires and mortgage companies often do this to curry favor with the borrower. But lenders can’t require borrowers to choose them as their mortgage servicer just because they paid for their counseling fee. That’s because HOEPA's counseling requirement is there to make sure borrowers are prepared for a mortgage loan. During counseling, if borrowers found that they aren't prepared for a mortgage, it wouldn’t make sense to force them to take one.
The lender is also not allowed to charge a fee for modifications in the loan.
Mortgage brokers and creditors can't advise someone to default on an existing loan while opening an account that will refinance all or part of their loans.
Prior to opening an account, the lender is required to make sure that the borrower enrolls in high-cost mortgage counseling that’s provided by a HUD-approved counselor or a state housing finance authority.
These Transactions Are Not Protected by HOEPA...
Because HOEPA's essential function is to protect homeowners from dishonest or abusive lending practices, there are some loans that it wasn’t designed to cover. A loan provided by a federal program, for instance, wouldn't be considered a predatory loan and so wouldn't need to be covered by HOEPA protections. Other types of loans that HOEPA doesn’t cover include:
Construction loans for a new home
A loan where the Federal Housing Finance Agency serves as the creditor
A loan through the USDA's Rural Housing Service Section 502 Direct Loan Program
HOEPA is the 1994 amendment to the Truth in Lending Act. This law aims to end abusive practices with high-cost mortgages, including refinances and closed-end home equity loans with high interest rates and fees. HOEPA includes criteria for high-cost mortgages and requires lenders to provide borrowers of these mortgages with certain disclosures. The terms of these high-cost mortgages are also limited by HOEPA. In the years since the law was enacted, protections have been expanded to give borrowers even more protections against potential abuses.