Key takeaways
- The House Possession and Fairness Safety Act (HOEPA) is a federal legislation that goals to guard shoppers from predatory mortgage lending.
- HOEPA primarily covers high-cost mortgages, that are outlined as loans with an annual proportion charge (APR) that exceeds the prime charge by a certain quantity.
- HOEPA contains provisions similar to assessing a borrower’s potential to repay, restrictions on mortgage phrases, and necessities for disclosures and pre-loan counseling.
What’s HOEPA?
The House Possession and Fairness Safety Act (HOEPA) is a 1994 modification to the Reality in Lending Act (TILA) that protects shoppers from predatory mortgage lending. Expanded considerably in 2010, the legislation requires mortgage lenders to supply debtors of “high-cost mortgages” (see under) with disclosures about how a lot the mortgage will value over its lifetime and the implications of default. All refinances and residential fairness loans that meet the factors for a “high-cost mortgage” are required to return with these particular disclosures. Below HOEPA, there are additionally restrictions on the mortgage phrases that lenders can supply.
As well as, HOEPA requires that debtors endure pre-loan counseling and restricts charges and penalties that may be imposed on them. Traditionally, debtors with poor credit score are supplied considerably costlier loans. HOEPA seeks to make sure that debtors who take out these high-cost loans have a transparent understanding of the phrases of their debt, and recourse ought to these phrases be violated.
What’s the Reality in Lending Act?
The Reality in Lending Act (TILA) is a federal legislation that goals to advertise transparency and shield shoppers in credit score transactions. Enacted in 1968, TILA requires lenders to reveal key phrases and prices of credit score to debtors, making certain they’ve correct details about the phrases of their loans. The legislation mandates the disclosure of the annual proportion charge (APR), finance fees, compensation phrases and different vital particulars. TILA additionally gives shoppers with the suitable to rescind sure kinds of loans inside a specified interval. The aim of TILA is to allow debtors to make knowledgeable choices and forestall unfair or misleading lending practices.
Which mortgage varieties does HOEPA cowl?
HOEPA usually covers the next mortgage varieties (major residences):
HOEPA doesn’t usually apply to:
What classifies as a high-cost mortgage?
A high-cost mortgage, outlined by HOEPA as “any shopper credit score transaction that’s secured by the buyer’s principal dwelling,” is one through which the annual proportion charge (APR) exceeds the typical prime supply charge for a comparable transaction by greater than 6.5 proportion factors for a first-lien mortgage (a major mortgage or refi of a major mortgage) or 8.5 proportion factors for a subordinate lien (like a house fairness mortgage or line of credit score).
If the related factors and charges are additionally above a sure threshold — usually, 5 p.c of the mortgage quantity — it’s additionally typically thought-about a high-cost mortgage. The Shopper Monetary Safety Bureau Bureau revises the minimal restrict for the overall factors and charges yearly, based mostly on the present Shopper Worth Index (CPI).
The presence or absence of sure different options may also decide a mortgage’s standing as high-cost. The legislation doesn’t enable high-cost mortgages to cost prepayment penalties or balloon funds, for instance.
When a mortgage is classed as high-cost, there are particular necessities that lenders should meet, together with specifically-worded disclosures about when the mortgage turns into efficient and the implications of defaulting. Lenders should additionally clearly disclose all mortgage phrases such because the APR, month-to-month funds and full quantity being borrowed. Debtors in high-cost mortgages even have enhanced cures for violations of the legislation.
The historical past of HOEPA
HOEPA was created in 1994 as an modification to the Reality in Lending Act (TILA). Its function was to deal with unfair and abusive practices from lenders who had been charging excessive rates of interest and excessive charges on refinances and closed-end dwelling fairness loans.
The following decade noticed a big progress in unscrupulous lending practices, subprime loans and various mortgages — all of which led to the monetary disaster of 2006-7 and the Nice Recession of 2007-09. In consequence, HOEPA was expanded in 2010 underneath the Dodd-Frank Wall Road Reform and Shopper Safety Act to incorporate buy mortgages (that’s, loans to purchase houses) and open-end credit score plans, similar to HELOCs. This modification additionally added new protections for high-cost dwelling loans and enabled householders to obtain pre-purchase counseling earlier than taking out a high-cost mortgage.
What adjustments did the Dodd-Frank Act make to HOEPA?
The Dodd-Frank Act introduced vital adjustments to the House Possession and Fairness Safety Act. When initially enacted in 1994, HOEPA utilized primarily to refinances and residential fairness loans. Below Dodd-Frank, the scope of loans underneath HOEPA’s purview widened to incorporate dwelling buy loans and residential fairness strains of credit score (HELOCs). The Act additionally launched new thresholds based mostly on prepayment penalties to establish high-cost mortgages and lowered the prevailing thresholds for mortgage charges and factors and charges.
These adjustments resulted in additional loans being categorized as high-cost mortgages. The Act additionally imposed restrictions on these high-cost mortgages, such because the prohibition of balloon funds, and required that debtors obtain counseling (a provision expanded in 2013 to encourage shoppers to acquire homeownership counseling for different kinds of loans).
HOEPA guidelines and rules
There are a number of provisions inside HOEPA, together with:
- Assessing a borrower’s potential to repay: Earlier than issuing a high-cost mortgage, the mortgage lender should completely overview the borrower’s funds, together with credit score historical past, revenue, property and debt.
- Restrictions on phrases: The legislation restricts balloon funds and due-on-sale clauses in most circumstances, and lenders can’t cost a prepayment penalty. There are additionally limitations on late charges and another restrictions.
- Disclosures: At the very least three days previous to the mortgage’s closing, the lender should present a written disclosure to the borrower that explains mortgage particulars together with annual proportion charge (APR) and month-to-month cost, in addition to the implications of default.
- Counseling: Previous to closing, the borrower should obtain accredited homeownership counseling that covers the disclosures in addition to budgeting and affordability.
Different borrower protections that apply to high-cost mortgages
Regulation Z, a element of TILA (though generally the 2 are referred to interchangeably), mandates that mortgage lenders present disclosures earlier than issuing loans. It requires that debtors obtain one breakdown of prices and bills when making use of for a mortgage and a second, finalized itemizing at the least three days earlier than closing. This follow permits the borrower to check the ultimate phrases of the closing disclosure to the preliminary mortgage estimate.
Regulation Z additionally prohibits lenders from receiving compensation for committing the borrower to a particular kind of mortgage, or from steering debtors right into a mortgage that leads to extra compensation for the mortgage officer, except doing so is within the borrower’s greatest curiosity.
What can debtors do underneath HOEPA?
HOEPA empowers shoppers in just a few methods. First, it permits aspiring householders with poor credit score to get a mortgage with out extraordinarily excessive charges or rates of interest.
It additionally permits debtors to report their lender if they believe it has violated HOEPA rules or engaged in predatory lending ways. If it actually has, they will cancel the mortgage or will not be liable to pay its charges.
