All You Need to Know about Mortgage HOEPA Compliance Requirements
HOEPA, also known as the Home Ownership and Equity Protection Act was enacted way back in 1994 in order to combat abusive lending practices in mortgage dealings across USA. HOEPA provides borrowers added protection for mortgages with high annual percentage rates (APRs) or high points and fees (high-cost mortgages).
What HOEPA Brings to the Table?
The Dodd-Frank Act amended HOEPA to enhance its protection and provide home owners with better security. Some of the amendments which make HOEPA relevant in the mortgage lending scene include -
Loans covered by HOEPA include both open-ended home-secured credit transactions (for e.g. home equity lines of credit) and home-purchase loans, which were previously exempted
A new threshold was added for high-cost mortgages based on the prepayment penalties
Existing thresholds based on a loan's rate, points, and fees were lowered so more loans were considered as high-cost mortgages
Additional restrictions were imposed on high-cost mortgages, including the prohibition of ballooning payments regardless of loan term
Loans Covered Under HOEPA
Some 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 HELOCs
At the same time, there are quite a few loans which are exempt from proper HOEPA coverage, including -
Mortgages which are secured by second/vacation homes
Construction loans (only initial constructions of new houses)
HFA (Housing Finance Agency) financed loans
Loans belonging to USDA (U.S. Department of Agriculture) rural development program
How to Determine Whether a Loan Belongs to the "High-cost Mortgage" Bracket?
As we have seen previously, only high-cost mortgages belong to HOEPA. At the same time, there is often confusion about which loans are considered high-cost mortgages. In simple terms, a loan is considered high-cost if the transaction's APR (Annual Percentage Rate) exceeds the APOR (Average Prime Offer Rate) on a particular date for comparable transactions which is more than -
6.5% points for any first-lien transaction
8.5% points for first-lien transactions (<$50,000) and secured by personal items and property such as RVs, houseboats, etc.
8.5% points for all junior-lien transactions
In certain cases, a loan can also be considered to be high-cost by calculating the total amount of points and fees paid during the transaction tenure, or also with the help of prepayment penalties.
Disclosure Requirements for HOEPA
According to the HOEPA act, if a loan meets all the above-mentioned criteria, the lender has to provide several disclosures to the borrowers at least 3 days before the loan is closed. The disclosures required for HOEPA include -
Written/Typewritten notice stating that the loan is not finalized, even though the application is signed. In this way, borrowers get three days to decide whether to finalize the loan agreement or not
A written/typewritten notice warning the borrower that since the lender has a mortgage on his/her home, they are liable to losing their home unless the payments are made in due time
At FWS, we have more than 15 years of experience in helping lenders optimize their systems, procedures, policies, controls, and training in compliance to HOEPA rules and regulations. We have offered our mortgage services, including mortgage underwriting, loan processing, etc. to global clients at cost-effective rates.