Key Takeaways
- HOEPA protects consumers from predatory lending practices on high-cost mortgages
- High-cost triggers: APR exceeds APOR by 6.5% (first lien) or 8.5% (subordinate), or points/fees exceed 5% of loan amount
- Prohibited practices include balloon payments, negative amortization, and prepayment penalties
- Borrowers must receive pre-loan counseling from HUD-approved counselor
- Violations give borrowers an extended 3-year right of rescission
- Lenders face actual damages, statutory damages, attorney fees, and potential criminal penalties
High-Cost Mortgages (HOEPA)
The Home Ownership and Equity Protection Act (HOEPA) is an amendment to TILA that provides additional protections for consumers taking out high-cost mortgages. HOEPA targets predatory lending practices by imposing strict requirements on loans that meet certain cost thresholds.
What Triggers HOEPA Coverage?
A mortgage is considered a "high-cost mortgage" under HOEPA if it meets any of these triggers:
APR Trigger
| Loan Type | APR Threshold |
|---|---|
| First lien | APR exceeds APOR by more than 6.5 percentage points |
| Subordinate lien | APR exceeds APOR by more than 8.5 percentage points |
| Personal property (manufactured housing) | APR exceeds APOR by more than 8.5 percentage points |
APOR = Average Prime Offer Rate, published weekly by the CFPB
Points and Fees Trigger
| Loan Amount | Points/Fees Threshold |
|---|---|
| Loan ≥ $28,847 (2026) | Points and fees exceed 5% of total loan amount |
| Loan < $28,847 (2026) | Points and fees exceed the lesser of 8% or $1,443 |
Prepayment Penalty Trigger
Any prepayment penalty that:
- Can be charged more than 36 months after consummation, OR
- Exceeds more than 2% of the amount prepaid
Prohibited Practices for High-Cost Mortgages
HOEPA prohibits the following practices on high-cost mortgages:
| Prohibited Practice | Explanation |
|---|---|
| Balloon payments | Cannot require balloon payment if loan term < 5 years |
| Negative amortization | Loan cannot have payment schedule where principal increases |
| Prepayment penalties | Generally prohibited; limited exceptions |
| Encouraging default | Cannot advise or encourage borrower to default on existing loan |
| Modification fees | Cannot charge fees for modification, deferral, or forbearance |
| Late fees > 4% | Late payment charges cannot exceed 4% of past due amount |
| Late fees pyramiding | Cannot add late fee to amount used to calculate next late fee |
| Acceleration clauses | Cannot accelerate unless borrower fails to perform |
| Financing points/fees | Cannot finance prepaid finance charges |
| Due-on-demand clauses | Cannot include unless borrower defaults |
Required Pre-Loan Counseling
Before a high-cost mortgage can be consummated:
- Borrower must receive counseling from a HUD-approved counseling agency
- Counselor must be independent (not employed by or affiliated with lender)
- Lender must provide a list of HUD-approved counselors
- Counselor provides written certification of counseling completion
- Lender cannot proceed until certification is received
What Counseling Must Cover
- Loan terms and features
- Budget and ability to repay
- Alternative loan options
- Consequences of default and foreclosure
- Rights of the borrower
Enhanced Disclosures
Lenders must provide additional disclosures at least 3 business days before closing:
| Required Disclosure |
|---|
| Statement that loan is a high-cost mortgage |
| Borrower is not required to complete the transaction |
| Borrower may lose the home if they fail to make payments |
| APR, regular payment amount, loan amount |
| Total amount borrower will have paid after making all payments |
Extended Right of Rescission
High-cost mortgages have an extended rescission period:
| Scenario | Rescission Period |
|---|---|
| Normal | 3 business days after consummation |
| If disclosures not provided | Up to 3 years from consummation |
| If HOEPA violated | Up to 3 years from consummation |
Ability to Repay Requirements
For high-cost mortgages, lenders must:
| Requirement |
|---|
| Verify borrower's income and assets using third-party documents |
| Consider borrower's current and expected income |
| Consider borrower's employment status |
| Consider borrower's current obligations |
| Use fully-indexed rate for ARMs when calculating DTI |
| Ensure borrower has reasonable ability to repay |
HOEPA Penalties
Violations of HOEPA can result in:
| Penalty Type | Amount/Consequence |
|---|---|
| Actual damages | Any actual financial harm suffered |
| Statutory damages | Finance charges + fees paid over life of loan |
| Attorney fees | Reasonable attorney's fees and costs |
| Rescission | Extended 3-year rescission right |
| Criminal penalties | Up to $5,000 fine and/or 1 year imprisonment (willful violations) |
| Enhanced damages | Pattern or practice violations: up to $4,000 per violation |
A first-lien mortgage has an APR of 12% when the APOR is 5%. Is this considered a high-cost mortgage under HOEPA?
Which of the following is a required step before consummating a high-cost mortgage under HOEPA?
What is the maximum late payment charge allowed on a high-cost mortgage under HOEPA?