Chapter 3 Home Ownership Protection Act (HOEPA) & Higher Priced Mortgages (HPML) Flashcards
Home Ownership and Equity Protection Act (HOEPA)
Amendment made to TILA in 1994 to protect consumers from predatory lending practices. Known as section 32 of Reg Z.
What types of transactions are tested with HOEPA? If they meet the coverage tests they are required to comply.
-Purchase-money loans
-Refinances
-Close-end home equity loans
-Open-end credit plans (like HELOCs)
Transactions exempt from HOEPA
-Reverse mortgages
-Construction loans
-Loans originated and directly financed by a Housing Finance Agency
-USDA loans
(Most credit transactions secured by the consumer’s principal dwelling are subject to HOEPA. This means that vacation homes and second homes are not covered. Though RV’s or houseboats can be if they are the primary dwelling.)
3 HOEPA coverage tests to determine if it is a high-cost mortgage
-If APR exceeds the Average Prime Offer Rate (APOR)
-If the transaction exceeds 5% of the loan amount for loans greater than $22,969 or for loans less than $22,969 the lesser of 8% of the or $1,103.
-If there is a prepayment penalty that is more than 36 months after consummation or account opening or is an amount more than 2% of the amount prepaid.
HOEPA Requirements
-Additional and specific disclosures
-Restricts terms on transactions
-Restricts fees and practices,
-Adds additional ability to repay requirements.
-Pre-loan counseling for all high-cost home loans
-Full appraisals,
-and escrows for the first 5 years.
When is the HOEPA disclusure due
-Required at least 3 business days before consummation.
-Must be written and must inform the customer that the loan will not be effective until consummation.
-Must explain the consequences of default.
-Disclose loan terms, APR, the amount borrowed, and monthly payment.
-If variable rate loan, the disclosure must explain the max monthly payment.
Features Acts and Practices restricted by HOEPA
-Balloon payments
-prepayment penalties
-due-on- demand features
-Recommending default on any existing loan to be refinanced by a high-cost mortgage
-Charging a fee to modify, defer, extend or amend a high-cost mortgage
-Late fees cannot exceed 4% of past due payment, and pyramiding late fees is prohibited.
-Fees for payoff statements are generally banned
-Points and fees cannot be financed, but financing
-Cannot structure a transaction to evade HOEPA
-Negative amortization
-Payment schedule that consolidates more than 2 periodic payments and pays them in advance from the loan proceeds (Balloon payment)
-Increases in interest rate after default
-Paying a contractor under a home-improvement contract from the proceeds of a high-cost mortgage
-Selling a high-cost mortgage in the secondary market without providing a high-cost mortgage notice to the assignee
-Refinancing any high-cost mortgage into another high-cost mortgage within 1 year after having extending credit, unless the refinancing is in the consumers’ best interest.
ATR requirements for high-cost mortgages
For closed-end HOEPA loans must follow ATR rules. For open-end high-cost mortgages, repayment ability must be determined using HOEPA’s ability to repay rules. Lenders must consider;
-Current and reasonably expected income or assets (must be verified)
-Current obligations, including any mortgage-related obligations.
HOEPA Homeownership counseling requirements
Before making a high-cost home loan, the borrower must undergo homeownership counseling. The lender must receive a written certification from the counselor that the borrower has completed the requirements.
All federally related loan applicants must receive a list of housing counselors. The list must be sent 3 business days after receiving the application.
Applies to high-cost mortgages and negative amortization loans made to first-time borrowers.
Higher-priced mortgages (HPML)
Section 35 under TILA.
Similar to high-cost mortgages (HOEPA)
Covers closed-end consumer credit transactions secured by a consumers principal dwelling with an APR that exceeds the APOR for a comparable transaction by;
-1.5% for loans secured by a first-lien loan
-3.5% for a second-lien loan.
HPML Requirements
-Escrow account for property taxes and premiums for mortgage-related insurance for the first 5 years.
-Written appraisal of the property to be mortgaged. The appraisal must be provided to the borrower no later than 3 business days before consummation.
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Restrictions for the lender under HPML
-Cannot rely on the collateral alone
-Cannot rely on consumer-provided information on income and assets without verification
-Cannot charge a prepayment penalty if the rate can change in the first 4 years of a loan. Otherwise, a 2% penalty is allowed.
-Must escrow for at least the first 60 months of the loan.
