The Home Ownership and Equity Protection Act (HOEPA) is a crucial piece of legislation designed to protect consumers from predatory lending practices and ensure transparency in the mortgage industry. Enacted as part of the Truth in Lending Act (TILA) in 1994 and later amended, HOEPA addresses the needs of homeowners and prospective buyers by regulating high-cost mortgages and promoting fair lending practices.

What is HOEPA?

The Home Ownership and Equity Protection Act (HOEPA) is a 1994 amendment to the Truth in Lending Act (TILA) aimed at shielding consumers from predatory mortgage lending practices. Expanded significantly in 2010, HOEPA mandates that lenders provide detailed disclosures to borrowers of “high-cost mortgages” about the total cost of the loan over its lifetime and the implications of default. These disclosures apply to all refinances and home equity loans that qualify as “high-cost mortgages.”

HOEPA also imposes restrictions on loan terms, requiring borrowers to receive pre-loan counseling and limiting fees and penalties that lenders can charge. Traditionally, borrowers with poor credit often face higher loan costs, but HOEPA seeks to ensure that those with high-cost loans fully understand their loan terms and have protections if those terms are not honored.

Which mortgage types does HOEPA cover?

HOEPA generally applies to the following types of loans for primary residences:

  • Purchase mortgages
  • Refinances
  • Home equity lines of credit (HELOCs) and home equity loans

However, HOEPA typically does not cover:

  • Reverse mortgages
  • Construction loans (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, as defined by HOEPA, is any consumer credit transaction secured by the borrower’s primary dwelling where 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 (such as a primary mortgage or refinance of a primary mortgage) or 8.5 percentage points for a subordinate lien (such as a home equity loan or line of credit).

Additionally, if the points and fees associated with the mortgage exceed a certain threshold—typically 5 percent of the loan amount—the mortgage may also be classified as high-cost. The Consumer Financial Protection Bureau (CFPB) updates the minimum limit for total points and fees annually based on the Consumer Price Index (CPI).

Certain features can also affect whether a mortgage is deemed high-cost. For instance, high-cost mortgages are prohibited from charging prepayment penalties or balloon payments.

When a mortgage is identified as high-cost, lenders must adhere to specific requirements, including providing detailed disclosures about the loan’s effectiveness, potential default consequences, APR, monthly payments, and the total amount borrowed. Borrowers with high-cost mortgages also have enhanced remedies if the law is violated.

The history of HOEPA

HOEPA, established in 1994 as an amendment to the Truth in Lending Act (TILA), was designed to combat unfair and abusive practices by lenders who charged exorbitant interest rates and fees on refinances and closed-end home equity loans.

In the following decade, the rise of predatory lending practices, subprime loans, and alternative mortgages contributed to the financial crisis of 2006-2007 and the subsequent Great Recession of 2007-2009. In response, HOEPA was significantly expanded in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act. This expansion extended protections to include purchase mortgages (loans for buying homes) and open-end credit plans like home equity lines of credit (HELOCs). It also introduced new safeguards for high-cost home loans and mandated pre-purchase counseling for borrowers considering high-cost mortgages.

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

The Dodd-Frank Act significantly expanded the Home Ownership and Equity Protection Act (HOEPA). Originally enacted in 1994, HOEPA primarily targeted refinances and home equity loans. The Dodd-Frank Act broadened HOEPA’s scope to include home purchase loans and home equity lines of credit (HELOCs). It also introduced new criteria for identifying high-cost mortgages, including revised thresholds for prepayment penalties, loan rates, and points and fees.

As a result, more loans are now classified as high-cost under HOEPA. The Act imposed additional restrictions on these high-cost mortgages, such as banning balloon payments, and required borrowers to undergo counseling. This counseling requirement was later expanded in 2013 to encourage homeownership counseling for various types of loans.

HOEPA rules and regulations

HOEPA includes several key provisions:

  • Assessment of Repayment Ability: Lenders must carefully evaluate a borrower’s financial situation before issuing a high-cost mortgage. This includes reviewing the borrower’s credit history, income, assets, and debt.
  • Restrictions on Terms: The law limits certain mortgage terms, including prohibiting balloon payments and due-on-sale clauses in most cases. Lenders are also barred from charging prepayment penalties and face restrictions on late fees and other charges.
  • Disclosure Requirements: At least three days before closing, lenders must provide borrowers with a written disclosure detailing the loan’s annual percentage rate (APR), monthly payment, and the potential consequences of default.
  • Counseling: Borrowers are required to receive approved homeownership counseling before closing. This counseling must cover the loan’s disclosures, as well as topics related to budgeting and affordability.

Other borrower protections that apply to high-cost mortgages

Regulation Z, part of the Truth in Lending Act (TILA) and often mentioned alongside it, requires mortgage lenders to provide detailed disclosures to borrowers. Lenders must give a preliminary breakdown of costs and expenses when the loan is applied for and a finalized disclosure at least three days before closing. This allows borrowers to compare the final terms of the closing disclosure with the initial loan estimate.

Additionally, Regulation Z prohibits lenders from receiving compensation for directing borrowers toward a specific type of loan or steering them into a mortgage that yields higher compensation for the loan officer, unless it is in the borrower’s best interest.

What can borrowers do under HOEPA?

HOEPA offers several key protections for consumers. It helps aspiring homeowners with poor credit obtain loans without exorbitant fees or interest rates. Additionally, it provides borrowers the right to report lenders who they believe have violated HOEPA regulations or engaged in predatory lending practices. If a violation is confirmed, borrowers can either cancel the loan or be exempt from paying certain fees.