Home Ownership and Equity Protection Act: What You Need to Know

The Home Ownership and Equity Protection Act (HOEPA) is a federal law designed to protect homeowners from predatory lending practices. It was enacted in 1994 to safeguard consumers from unfair and deceptive mortgage lending practices.

The law applies to high-cost home loans, which are defined as loans with fees and interest rates that exceed certain limits. These limits vary depending on the loan amount and the type of property being purchased.

Homeowners who are victims of predatory lending can seek relief through the HOEPA. The law allows consumers to rescind certain types of loans within three days of signing the agreement. This means that homeowners can back out of the loan and avoid any further financial obligations.

The HOEPA also requires lenders to provide clear and accurate disclosures about the terms and conditions of the loan. This includes information about the interest rate, fees, and repayment terms.

The Homeownership Protection Act is a vital part of the Home Ownership and Equity Protection Act (HOEPA). It was enacted in 1994 as an amendment to the Truth in Lending Act (TILA) to address abusive practices in refinancing and closed-end home equity loans with high interest rates or high fees.

To qualify for these protections, HOEPA loans must meet specific high-cost coverage tests, which apply to transactions commencing on or after January 10, 2014. These tests are designed to identify loans that are likely to be predatory or unfair to consumers.

Some of the key features of the Homeownership Protection Act include:

These types of transactions must be tested against the HOEPA coverage tests. If they meet any of the coverage tests, the loan must comply with the high-cost loan restrictions on loan terms and other protections.

Loans subject to HOEPA coverage include purchase-money mortgages, refinances, closed-end home equity loans, and open-end credit plans (i.e. HELOCs).

The 2013 HOEPA Rule exempts reverse mortgages, construction loans that finance the initial construction of a new dwelling, loans originated and directly financed by a Housing Finance Agency (HFA), and loans originated under the U.S. Department of Agriculture's (USDA's) Rural Development Section 502 Direct Loan Program.

Certain features are specifically banned from HOEPA loans, including balloon payments, negative amortization, default rates that are higher than the loan's regular rate, and due-on-demand clauses for reasons other than misrepresenting yourself in the loan application, causing damage to the home, or failing to make payments on time.

Here are some loan types that are exempt from HOEPA coverage:

Loans with coverage under HOEPA are pretty straightforward. They include purchase-money mortgages, refinances, closed-end home equity loans, and open-end credit plans, such as HELOCs.

These loan types are subject to HOEPA coverage if they meet certain stipulations. A first-lien loan has an annual percentage rate more than eight percentage points higher than the rate on Treasury securities, or if the complete fees and points paid by the consumer at or before closing are higher than eight percent of a total loan amount.

For second-lien loans, the APR will exceed 10 percentage points about the rates of Treasury securities. These rules affect home equity installment loans or refinancing attempts that meet the same criteria for a high-fee or high-rate loan.

Here's a breakdown of the loan types that are typically covered:

And here are some loan types that are not typically covered:

Note that the specific rules for calculating points and fees for HOEPA coverage are as follows:

Loans that are exempt from HOEPA coverage include reverse mortgages, which allow homeowners to borrow money using the equity in their home. These loans are not subject to HOEPA rules.

Construction loans that finance the initial construction of a new dwelling are also exempt. This means that loans for building an addition or making home improvements do not qualify for this exemption.

Loans originated and directly financed by a Housing Finance Agency (HFA) are exempt from HOEPA coverage. This includes loans from agencies like Fannie Mae and Freddie Mac.

Loans originated under the U.S. Department of Agriculture's (USDA's) Rural Development Loan Program are also exempt.

Here are some examples of loans that are exempt from HOEPA coverage:

Loans subject to HOEPA coverage are restricted from incorporating certain features that can unduly inhibit your ability to repay the loan. These features are specifically banned from HOEPA loans.

Banned features include balloon payments, which are lump sum payments that are more than double the amount of usual payments, mandated for loans with terms less than five years. Defaulted interest rates that are higher than pre-default rates are also prohibited.

Rebates of interest on default, calculated by unfavorable methods, are not allowed. Negative amortization, which are smaller monthly payments that fail to pay off the balance of the loan while increasing the total principal debt, is also prohibited.

The majority of prepayment penalties are banned, with exceptions for certain situations. A repayment schedule that lumps together more than two periodic payments to be paid in advance from loan proceeds is also not permitted.

A due-on-demand clause, which allows the lender to demand full repayment of the loan at any time, is prohibited, except in certain situations such as fraud or misrepresentation on behalf of the consumer.

Here are some of the banned features in a concise list:

Determining a mortgage loan can be a complex process, but there are some key factors to consider. A loan is considered high-cost if its annual percentage rate (APR) exceeds the Average Prime Offer Rate (APOR) for comparable transactions on that date by more than 6.5 percentage points for first-lien transactions, or 8.5 percentage points for first-lien transactions that are for less than $50,000 and secured by personal property.

There are also specific thresholds for points and fees paid in connection with the transaction. If the points and fees exceed 5 percent of the total loan amount for a loan amount greater than or equal to $20,000, or 8 percent of the total loan amount or $1,000 (whichever is less) for a loan amount less than $20,000, the transaction is considered a high-cost mortgage.

To help you understand the APR for HOEPA coverage, it's calculated by using the rate in effect on the date you set the interest rate for the transaction, or the greater of the introductory interest rate or fully-index rate for variable-rate transactions.

A mortgage loan can be a complex and daunting concept, but understanding the basics can help you navigate the process with ease. To determine if a loan is considered a high-cost mortgage, you need to look at the annual percentage rate (APR) and compare it to the Average Prime Offer Rate (APOR).

The APR is a crucial factor in determining a high-cost mortgage. If the APR exceeds the APOR by more than 6.5 percentage points for first-lien transactions, or 8.5 percentage points for first-lien transactions that are for less than $50,000 and secured by personal property, or 8.5 percentage points for junior-lien transactions, then it's considered high-cost.

The amount of points and fees paid in connection with the transaction are also a key factor. If the points and fees exceed 5% of the total loan amount for a loan amount greater than or equal to $20,000, or 8% of the total loan amount or $1,000 (whichever is less) for a loan amount less than $20,000, then it's considered a high-cost mortgage.

Here's a summary of the APR thresholds for high-cost mortgages:

Remember, these thresholds are subject to change, so it's essential to check the APOR regularly. By understanding these basics, you can make informed decisions about your mortgage loan and avoid potential pitfalls.

A mortgage is essentially a loan that allows you to borrow money to buy a home. The loan is secured by the home itself, which means that if you fail to repay the loan, the lender can take possession of the property.

High-cost mortgages, on the other hand, have stricter regulations. To qualify as a high-cost mortgage, the annual percentage rate (APR) must exceed the average prime offer rate by more than 6.5 percentage points for a first-lien loan.

Certain features, such as prepayment penalties or balloon payments, are not allowed in high-cost mortgages. This means that if you want to pay off your mortgage early, you won't face any extra fees.

Lenders must clearly disclose all loan terms, including the APR, monthly payments, and full amount being borrowed, for high-cost mortgages. This ensures that you know exactly what you're getting into before signing the loan agreement.