Partners (Summer 2000)

By Keenan Conigland

What is HOEPA?
The Home Ownership Equity Protection Act of 1994 (HOEPA) is a federal disclosure law designed to address certain unfair lending practices.

HOEPA, as implemented through Section 32 of the Federal Reserve’s Regulation Z, seeks to protect homeowners targeted by predatory lenders that characteristically use high interest rates, exorbitant fees, and unreasonable repayment terms. HOEPA does not prohibit creditors from making a particular type of home-secured loan. Instead, the law classifies groups of high-cost mortgage loans through rate and fee triggers. Loans above the triggers are subject to greater disclosures and restrictions.

Covered Loans
HOEPA covers loans that have (1) an annual percentage rate (APR) exceeding the rate on a comparable-maturity Treasury note by more than 10 percentage points, and (2) total nondiscount points and fees exceeding the larger of $451 (effective 1-1-00, adjusted annual for changes in the CPI) or 8 percent of the total loan amount. The rule does not cover reverse mortgages or home equity lines of credit.

Required Disclosures
For covered loans, a borrower must receive a written disclosure of the APR and regular payment amount. For variable rate loans, the maximum monthly payment also must be presented.

The notice must warn the borrower in plain language that because the lender will hold the mortgage, the borrower could lose the residence and any money put into it if the payments are not made. The lender must give the borrower a written notice at least three business days before the loan is finalized stating that the loan need not be completed, even though the agreement has been signed, and the borrower may rescind the agreement at any time during this period. These HOEPA disclosures are in addition to the other Truth in Lending Act disclosures that must be made no later than the closing of the loan.

Limitations / Prohibited Practices
Under HOEPA, the following practices are generally banned:

  • Balloon payments within 5 years;
  • Negative amortization;
  • Advance payments (where two or more payments are paid in advance from the proceeds);
  • Increased interest rate (where interest is higher upon default);
  • Rebates (where a refund is calculated by a method less favorable than the actuarial method for rebates of interest arising from a loan acceleration due to default);
  • Prepayment penalties, except within the first 5 years of the loan if the source of the prepayment funds is not a refinancing by the same creditor and the borrower’s total monthly debt-to-income ratio is under 50%;
  • Extending credit without regard to the payment ability of the borrower; and
  • Disbursing funds for home improvement loans directly to the contractor rather than directly to the borrower, jointly to the borrower and the contractor, or to the escrow agent.
  • Selling or otherwise assigning a mortgage without furnishing the following statement to the purchaser or assignee: “Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor.”
Rule-Writing Authority
The Board of Governors has rule-writing authority under HOEPA to lower the triggers for interest rates and associated fees by two percentage points, and modify the limitations and prohibited practices. HOEPA authorizes the Board to hold hearings periodically to keep abreast of the home equity credit market.

In 1997, the Federal Reserve Board held its first public hearings concerning this subject. This summer, the Board hosted four more public hearings to ascertain whether the HOEPA should be changed to better speak to the issue of predatory lending. The Board invited a cross-section of consumers, advocates, and lenders to participate in the hearings, which were held in Charlotte (July 27), Boston (August 4), Chicago (August 16), and San Francisco (September 7).

The hearings bore out the complexity and enormity of the issue and raised many suggestions that will be considered by the Board. Any tightening of the regulations implementing the law would have to take into consideration the potential effect on responsible subprime lending.

Because HOEPA is but one tool in addressing predatory lending, broader solutions must be multi-faceted and incorporate both a regulatory and non-regulatory approach.

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