1.9 High-Cost Mortgages (HOEPA)
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
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?