What is HOEPA and what are the features that are banned from high-rate mortgage loans?


If you are taking a high-rate loan, using your house as collateral, it is highly recommended you know what is HOEPA. The Home Ownership and Equity Protection Act (HOEPA) of 1994 is the law that protects consumers when taking high-fee, high rate loans.

Basically, loans in a first lien position whose rate exceeds with 8% the Treasury maturity rates, and second lien loans (except HELOCs) whose interest rate is 10% over the Treasury securities rate will be regulated by HOEPA, as they are considered high-rate loans.

Also, if your loan-related points and fees exceed 8% or a preset amount (set annually by the FTC) your loan is considered high-fee loan.

HOEPA demands that the lender provides additional mortgage loan disclosures when it is a high rate, high fee loan along with standard TILA disclosures.

HOEPA prohibits the following features from expensive mortgages:

  • Negative amortization;
  • Balloon payments for loans with 5-year terms, or shorter. Balloon payments are allowed for bridge loans that are used to buy or build a home;
  • Interest rate increase;
  • Unfavorable interest calculation, when a borrower defaults;
  • Prepayment penalties (with some exceptions);
  • Due-on-demand clauses except when the consumer gets involved in a fraud, or the consumer defaults with the loan repayment, or consumer acts affect negatively the home, used as security for the loan

When extending HOEPA loans, lenders are disallowed to:

  • Refinance your HOEPA loan into a new HOEPA loan within 12 months from the transaction, unless it's in the borrower's best interest.
  • Structure HOEPA loans as HELOCs unless there is an obvious need for repetitive disbursements of funds.
  • Make HOEPA loans disregarding the borrower's ability to repay the loan.

What happens when HOEPA terms are violated?

You can sue the creditors for failing to comply with HOEPA and TILA terms. If the lawsuit is successful, damages and legal costs can be fully recovered, and you might get the right to rescind the loan (when TILA compliance is violated).

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