Home Ownership and Equity Protection Act, also known as HOEPA, was passed to eliminate unscrupulous mortgage lending practices. With the enactment of this law, new requirements and features were introduced for high cost mortgages in order to protect borrowers.
HOEPA was approved in 1994 as a revision to Truth in Lending Act (TILA), providing an extra layer of protection to mortgagors who qualify for high cost home loans. The specific rules applicable to these loans are clearly outlined in Section 32 of Regulation Z. However, with the advent of Dodd-Frank Act, HOEPA went through a round of amendment, enhancing borrower security and improving the quality of loans disbursed. With the introduction of new amendments, lenders are required to know that high-cost mortgage borrowers must now be provided with additional disclosures, including counselling regarding homeownership.
This article will share everything you need to know about amended HOEPA requirements so you can avoid expensive compliance mistakes.
HOEPA Requirements Following Dodd-Frank Act
Extended HOEPA Coverage to HELOCs
With 2013 HOEPA amendment, the act expanded its scope to cover previously exempt purchased-home mortgages, refinances, open-end credit plans (HELOCs) and closed-end home equity loans. However, despite its increased product coverage, construction loans and reverse mortgages remain exempt. At the same time, CFPB added another exception for loans that are originated and financed through Housing Finance Agency and USDA’s Direct Loan Program.
Revised APR Threshold
The APR test coverage under HOEPA is also revised. According to this revision, a transaction is considered high cost mortgage if its APR is more than Average Prime Offer Rate (APOR) for a similar transaction. The lower margin added to a comparable transaction lowers the threshold, allowing more loans to qualify as high-cost mortgages.
Points and Fees Coverage
The points and fees limit was reduced from 8% to 5% of the total loan amount. However, this rule does not apply to loans that are less than $20,000 as the points and fees in this case cannot exceed $1000 or 8% of total loan value, whichever is lower.
Prepayment Penalties Coverage Test
A transaction is defined as high-cost mortgage if a prepayment penalty is charged:
- More than 2% of the prepaid amount
- 36 months after the account opening or loan consummation
According to this amendment, lenders cannot impose prepayment penalties that exceed the thresholds discussed above. The prepayment penalty test coverage ensures that the penalty amount is compatible with maximum amount charged and within the maximum time frame on transactions that fall under HOEPA coverage. Thus creditors planning to leverage prepayment penalties in high-cost home loans must consider these limitations during the origination stage and ensure that they are compliant with these changes.
HOEPA Disclosure Requirements for High-Cost Mortgages
The lenders must identify high-cost mortgage during the origination stage to know if HOEPA is applicable to the loan. In case the mortgage falls under HOEPA loan, the lender will be required to stay compliant with Dodd-Frank imposed restrictions and disclosure requirements.
Let us discuss these new limitations for HOEPA loans as outlined in Z Regulation:
- Lenders and brokers cannot provoke borrowers to default on their loan so that it can be refinanced as a high-cost mortgage
- Lenders are prohibited from amending, renewing, extending or modifying existing high-cost home loan
- Late fee can only be imposed once on a single amount and cannot exceed more than 4% of the overdue amount
- No fee should be charged for payoff statement
- Point and fees test charges cannot be financed by lenders
- Pre-loan counselling is mandatory before high-cost mortgage can be originated
What It Means for the Lenders
With the HOEPA amendments, the scope of loans qualified as high-cost mortgages has increased and new restrictions are imposed on these loans. The lenders need to ensure that their systems, training, policies and procedures have been upgraded to incorporate the new rules. It is also important for the lenders to have a system in place that can identify existing products that fall under high-cost home loans. If so, they must guarantee that these loans meet HOEPA’s disclosures, restrictions and other requirements.
For lenders to stay in business and keep their loans profitable, remaining compliant is the first and foremost requirement. However, the ever changing mortgage industry can make that task a difficult one for lenders and brokers who also need to focus on their other core competencies. This is when a reliable mortgage service provider can make a huge difference to a lender’s business.
As a premium outsource mortgage partner Expert Mortgage Assistance has a decade of experience in optimizing lenders’ systems and processes in compliance with HOEPA requirements. We offer wide range of mortgage services like underwriting, closing and mortgage post-closing support etc., apart from compliance expertize, to our global clients. Call us today to discuss partnership possibilities.