As you will recall, the Home Ownership Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to the Truth-in-Lending Act and addressed abusive acts and practices in refinancing and home-equity mortgage loans with high interest rates or high fees.
The Dodd-Frank Act greatly expanded the coverage of HOEPA and added a number of protections for these so-called “High-Cost” mortgage loans.
On January 10, 2013, the CFPB issued its Final Rule, designed to strengthen the protections for consumers that find themselves in a High-Cost Mortgage. This rule is one of several announced by the CFPB in advance of its legislative deadline of January 21, 2013.
Banks have a threshold question to ask: How likely is it that our bank will make “High-Cost” (HOEPA) loans?
The Dodd-Frank Act did two things that would make it more likely that your bank would originate some of these loans. First, it expanded significantly the universe of loans covered by HOEPA. Now, most mortgage loans secured by a consumer’s principal dwelling are covered. These loan types include purchase-money mortgages (new), refinance loans, closed-end home-equity loans, and home-equity lines of credit (new). (construction loans and loans originated and financed by Housing Finance Agencies are exempt.)
The second method that the Dodd-Frank Act used to expand HOEPA coverage was an expansion of the APR and Points and Fees triggers. Now a loan will be a High-Cost (HOEPA) loan if any of the following tests are met:
- The loan’s annual percentage rate (APR) exceeds the applicable average prime offer rate (APOR) by more than 6.5 percentage points for most first-lien mortgages or by more than 8.5 percentage points for a first mortgage if the dwelling is personal property and the transaction is for less than $50,000.00;
- The loan’s APR exceeds the applicable average prime offer rate (APOR) by more than 8.5 percentage points for subordinate or junior mortgages;
- The loan’s points and fees exceed 5% of the total transaction amount or, for loans below $20,000.00, the lesser of 8% of the total transaction amount or $1,000.00; or
- The loan documents permit the creditor to charge or collect a pre-payment penalty more than 36 months after the loan closing or permit such fees or penalties to exceed, in the aggregate, more than 2% of the amount pre-paid.
The Final Rule also provides guidance on how to apply the various coverage tests such as how to determine the applicable APOR and how to calculate points and fees. In effect, these changes do the following:
- Change the APR benchmark from the yield on comparable Treasury Securities to the “average prime offer rate;”
- Revise the percentage-point thresholds for first-lien and subordinate-lien loans; and
- Create a separate, high percentage-point threshold for small dollar amount, first-lien loans secured by personal property (e.g. mobile homes, etc.)
For the time being, one potential point of confusion has been put to rest. The CFPB had originally proposed two alternative approaches to calculating the APR trigger. Alternative 1 used the APR compared to the APOR. Alternative 2 would have used much the same approach, but would have substituted a “transaction coverage rate” for the APOR to be compared to the APR. The second alternative would have been applicable if the CFPB elected to expand significantly the definition of “finance charge” under the Truth-in-Lending Act to include virtually all costs of loan origination. The CFPB has elected to postpone a decision on expanding the finance charge definition until it finalizes its TILA-RESPA Integration Proposal sometime later this year. For now, Alternative 1 (APR compared to APOR) is the metric.
The CFPB’s Final Rule also implements new restrictions and requirements contained in the Dodd-Frank Act concerning loan terms and origination practices for HOEPA loans. For example:
- Balloon payments are generally banned, unless they meet certain limited criteria, including those lenders operating predominately in rural or underserved areas. The exception for balloon loans made by small creditors operating predominantly in rural or underserved areas has several parts or conditions. A “small” creditor is defined as: (1) one with less than $2 billion in assets; (2) that extends 500 or fewer first-lien loans in the preceding year; and (3) made more than 50% of its covered loans in a rural or underserved area. This exception is identical to the exception for small creditors making balloon loans under the Ability-To- Pay/Qualified Mortgage Rule (discussed in a related article). The key points will be the 500 loan limit and whether those loans are made predominantly in “rural or underserved” areas. The CFPB will publish a list of rural and underserved markets. If a bank fails to qualify, it will not be able to make balloon loans if they would also be HOEPA loans.
- Creditors are prohibited from charging pre-payment penalties and financing points and fees.
- Late fees are restricted to 4% of the payment that is past due, fees for providing pay-off statements are restricted, and fees for loan modification or payment deferral are banned. Creditors originating HELOC’s are required to assess a consumer’s ability to re-pay (of course closed-end credit transactions are already subject to the ability to re-pay requirement.)
- Creditors and Mortgage Brokers are prohibited from recommending or encouraging a consumer to default on a loan or debt to be refinanced by a High-Cost Mortgage.
- Before making a High-Cost Mortgage, creditors are required to obtain confirmation from a Qualified Homeownership Counselor that the consumer has received counseling on the advisability of the mortgage.
Based on its research and the comments it received, the CFPB doesn’t appear to believe that this revised High-Cost Mortgage Rule will have a wide-spread impact. It reported that from 2004 through 2009 between 1000 to 2000 creditors reported making HOEPA loans. Between 80% and 90% of those making High-Cost loans made fewer than ten of these loans annually. Even with the expanded coverage and lower thresholds under the new Final Rule, the CFPB believes that High-Cost Mortgages will constitute only a small percentage of the mortgage loan origination business.
For starters, you should determine if your bank’s pricing or fee structure is likely to generate HOEPA loans. You should also review all prepayment penalty provisions in your loan documents, including any that may be hard coded into your loan documentation platform. Assuming you can establish parameters that avoid this class of loans generally, you may wish to establish a review process to check each primary dwelling-secured loan to make sure no HOEPA loans slip through the cracks. Remember that an inadvertent HOEPA loan can be corrected, but that correction must occur within thirty (30) days of origination.
Finally, be alert to future action by the CFPB on the subject of “Finance Charge.” If that definition is changed dramatically, it could have a significant impact on the APR trigger under HOEPA, turning many more of your loans into High-Cost (HOEPA) loans.