The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to the Truth in Lending Act (TILA), which became law in 1968. Both aimed to address abusive and predatory practices in mortgage refinancing and closed-end home equity loans — particularly those with high interest rates or high fees, commonly referred to as high-cost mortgages.
Passage of the Dodd-Frank Act in 2010 further amended TILA by expanding HOEPA’s scope to include purchase-money mortgages and open-end credit plans such as home equity lines of credit (HELOCs). In January 2013, the Consumer Financial Protection Bureau (CFPB) issued a rule formalizing the Dodd-Frank Act’s changes to HOEPA.
Known as the 2013 HOEPA Rule, it also implements two Dodd-Frank counseling requirements that may apply to creditors regardless of whether they make high-cost mortgages.
Specifics of the HOEPA Act
Before issuing a high-cost mortgage, the lender must thoroughly review the borrower’s finances — including debt, credit history, income, assets, and other related factors.
Since HOEPA’s enactment, refinances or home equity mortgage loans that meet any of HOEPA’s high-cost coverage tests are subject to special disclosure requirements and restrictions on loan terms. The law also provides consumers with enhanced remedies if a lender violates those requirements.
If a lender violates HOEPA in connection with your loan, you may have the right to sue.
HOEPA loans are sometimes referred to as Section 32 loans. To qualify for these protections, a loan must meet HOEPA’s coverage tests, which apply to transactions commencing on or after January 10, 2014.
HOEPA only applies to certain high-rate mortgage refinances and home equity loans for a principal residence, including:
- First mortgage refinances carrying an APR more than eight percentage points above the rate on Treasury securities of comparable maturity
- Second mortgages carrying an APR more than ten percentage points above the rate on Treasury securities of comparable maturity
- Mortgage loans on which closing costs exceed 8% of the loan amount
- Purchase-money mortgages
- Closed-end home equity loans
- Open-end credit plans such as home equity loans and HELOCs
These transaction types must be tested against HOEPA’s coverage tests. If a loan meets any of the coverage tests, it must comply with the high-cost loan restrictions on loan terms and the accompanying consumer protections.
Some parts of the 2013 HOEPA Rule relate to homeownership counseling and apply regardless of whether a loan is a high-cost mortgage. Under these requirements, creditors must provide a list of homeownership counseling organizations to most closed-end and open-end mortgage loan applicants within three days of application.
As of 2013, HOEPA extended coverage to HELOCs, subject to coverage tests. Any HELOC that qualifies as a high-cost mortgage is subject to most of the same requirements and restrictions as closed-end, high-cost mortgages.
The rule also tells creditors how to calculate a consumer’s ability to repay a high-cost HELOC, and how to apply the prohibition against balloon payments to high-cost HELOCs that have both a draw period and a repayment period.
How to Determine if a Transaction Is a High-Cost Mortgage
If a transaction is not exempt from HOEPA coverage, three separate coverage tests must be applied to determine whether it qualifies as a high-cost mortgage.
Test 1 — APR Test: A transaction is a high-cost mortgage if its annual percentage rate (APR) exceeds the Average Prime Offer Rate (APOR) for a comparable transaction by more than:
- 6.5 percentage points for most first-lien transactions
- 8.5 percentage points for first-lien transactions under $50,000 secured by personal property (such as RVs, houseboats, or manufactured homes titled as personal property)
- 8.5 percentage points for junior-lien transactions
Test 2 — Points and Fees Test: A transaction is a high-cost mortgage if its points and fees exceed the following thresholds (adjusted annually for inflation — verify current figures at consumerfinance.gov):
- 5% of the total loan amount for loans of $20,000 or more
- 8% of the total loan amount or $1,000 — whichever is less — for loans under $20,000
Test 3 — Prepayment Penalty Test: A transaction is a high-cost mortgage if it imposes a prepayment penalty more than 36 months after consummation or account opening, or if the prepayment penalty can exceed more than 2% of the amount prepaid.
HOEPA Exemptions
The 2013 HOEPA Rule exempts the following transaction types from HOEPA coverage:
- Reverse mortgages
- Construction loans that finance the initial construction of a new dwelling (this exemption does not extend to loans that finance home improvements or remodels)
- Loans originated and directly financed by a Housing Finance Agency (HFA)
- Loans originated under the USDA’s Rural Development Section 502 Direct Loan Program
The 3-Day Disclosure Rule
The 2013 HOEPA Rule requires lenders to provide specifically worded disclosures to consumers at least three business days before the loan closes. These disclosures must include:
- A written notice stating that you are not obligated to complete the loan, even if you have already signed the application
- A notice that you could lose your home to foreclosure if you fail to make timely loan repayments
- The APR, loan amount, and repayment schedule
- For adjustable-rate mortgages: the maximum monthly payment and a statement that the rate and payment may increase
The borrower must also complete approved homeownership counseling — covering the disclosures, budgeting, and affordability — before the transaction closes.
Loan Features Prohibited by HOEPA
Lenders may charge higher interest rates based on a borrower’s financial profile, but they are prohibited from incorporating certain features that would unduly impair a borrower’s ability to repay. The following are specifically banned from HOEPA loans:
- Balloon payments
- Negative amortization
- Default interest rates higher than the loan’s regular rate
- Default interest rebates calculated less favorably than non-default rebates
- Due-on-demand clauses, except in cases of misrepresentation on the loan application, damage to the property, or failure to make timely payments
If you’re navigating a high-rate mortgage situation, HOEPA provides an important layer of protection — ensuring you fully understand the terms of any agreement before you sign.
Full HOEPA Rule and Resources
Complete rules and regulations are outlined in the CFPB’s 2013 Home Ownership and Equity Protection Act (HOEPA) Rule compliance guide. For the most current thresholds and updates, visit consumerfinance.gov.
If you’re looking to refinance your mortgage or tap your home equity, Refi.com can help you explore your options. See how much equity you can access or start your application today.
