FAQs
HOEPA Requirements & Limitations
HOEPA COVERAGE
Question: Is the coverage of section 32 of Regulation Z [HOEPA or “high-cost mortgages”] limited to closed-end, consumer loans secured by the borrower’s principal dwelling?
Answer: Section 1026.32 of Regulation Z covers both closed-end and open-end credit extensions secured by the consumer’s principal dwelling if certain APR or points and fees thresholds are exceeded. The rule does however, specifically exempt reverse mortgage transactions, a transaction to finance the initial construction of a dwelling, a transaction originated by a Housing Finance Authority and a transaction covered by the U.S.D.A’s Rural Development 502 Direct Loan Program.
Question: What are the APR and points and fees coverage triggers for HOEPA loans?
Answer: A loan is considered a HOEPA loan, if the loan’s final APR exceeds the average prime offer rate (APOR) in effect as of the rate set date by more than:
- 6.5 percentage points for a first-lien transaction;
- 8.5 percentage points for a first-lien transaction if the dwelling is personal property and the loan amount is less than $50,000; or
- 8.5 percentage points for a subordinate-lien transaction; or
a loan is considered a HOEPA loan if the loan’s total points and fees, as defined in in section 1026.32(b)(1) and (2), exceed:
- 5 percent of the total loan amount for a transaction with a loan amount of $20,000 or more; (the $20,000 figure is adjusted annually on January 1 and the most recent amount can be found the IBA’s Annual Threshold Adjustment Chart here); or
- The lesser of 8 percent of the total loan amount or $1,000 for a transaction with a loan amount of less than $20,000; (the $1,000 and $20,000 figures are also adjusted annually on January 1 and can be found on the IBA’s Annual Threshold Adjustment Chart here); or
- Under the terms of the loan contract or open-end credit agreement, the creditor can charge a prepayment penalty, more than 36 months after consummation or account opening, or prepayment penalties that can exceed, in total, more than 2 percent of the amount prepaid.
A loan or line of credit is considered “high-cost” if it triggers either one of these thresholds; it does not have trigger both.
Question: What fees are considered “point and fees” under this rule?
Answer: The definition of points and fees is complicated. Generally, points and fees are finance charges known at or before consummation and paid in connection with the transaction by the borrower or a third party on the borrower’s behalf. However, the rule then exempts or backs out a number of typical finance charges associated with dwelling-secured transactions including any bona fide third-party charge not retained by the creditor/loan originator. Typically, charges that are “points and fees” include lender origination charges, processing fees, commitment and underwriting fees, interest rate lock in fees, escrow waiver fees, and other miscellaneous fees paid to and retained by the creditor. Non-refundable Private Mortgage Insurance paid at or before consummation (such as borrower single-premium) is also considered “points and fees”, while refundable PMI paid after consummation is not. Credit insurance product premiums such as credit life, credit disability, credit unemployment, debt cancellation and or debt suspension paid at or before consummation must also be included in the “points and fees” calculation. The IBA has developed a “Points and Fees Guide” which can be found here to assist banks in identifying points and fees.
Question: What is the “Presumption of Compliance” referred to in section 1026.34 for open-end high-cost mortgage loans?
Answer: The final rule Section 1026.34(a)(4)(iii) provides a compliance “safe harbor” called a “presumption of compliance.” A creditor will be deemed to have complied with this section if the creditor follows three underwriting procedures:
- Determines the consumer’s repayment ability by:
- Verifying consumer’s income or assets that it relies on to determine repayment ability, including expected income or assets, by the consumer’s W-2, tax returns, payroll receipts, financial institution records, or other third party documents that provide reasonable reliable evidence of the consumer’s income or assets; and
- Verifies the consumer’s current obligations, including any mortgage-related obligations required by another credit obligation undertaken prior to or at account opening, and are secured by the same dwelling that secured the high-cost mortgage transaction.
- Determines the consumer’s repayment ability taking into account current obligations and mortgage-related obligations and using the largest required minimum periodic payment based on the following assumptions:
- The consumer borrows the full credit line at account opening with no additional extensions of credit;
- The consumer makes only required minimum periodic payments during the draw period and any repayment period;
- If the annual percentage rate may increase during the plan, the maximum annual percentage rate that is included in the contract applies to the plan at account opening and will apply during the draw and repayment periods.
- Assesses the consumer’s repayment ability taking into account at least one of the following: the ratio of total current obligations, including any mortgage-related obligations (including property taxes; premiums and similar charges required by the creditor; fees and special assessments imposed by a condominium, cooperative, or homeowners association; ground rent and leasehold payments) that are required by another credit obligation undertaken prior to or at account opening, and are secured by the same dwelling that secures the high-cost mortgage transaction, to income, or the income the consumer will have after paying current obligations.
HOEPA REQUIREMENTS & LIMITATIONS
Question: If we make a HOEPA loan, do we have additional disclosure requirements?
Answer: Yes, the creditor must provide the borrower with a notice, warning the borrower they are entering into a transaction in which a mortgage is being taken on their home and that the borrower could lose their home and any money they have put into it if they fail to repay the loan. The notice also includes information about the loan including the loan’s APR, payment information and the amount borrowed. This notice must be provided at least three business days prior to consummation and is considered a “material disclosure” for rescission purposes.
Question: If we make a loan that is a covered HOEPA loan, do we have to wait to give the borrowers the HOEPA notice (required to be given to the borrower three days prior to consummation) until after the seven-day waiting period that begins with the delivery of the Loan Estimate has expired?
Answer: No — the HOEPA three-day disclosure period and the Regulation Z requirement that consummation not occur until seven-days after the Loan Estimate is delivered (or placed in the mail) can occur at the same time (run concurrently).
Question: Are there any other requirements or limitations placed on high-cost mortgage loans?
Answer: Yes, there are number of limitations related to extending high-cost mortgages including a high-cost mortgage transaction cannot:
- Include a balloon payment;
- Have a negative amortization schedule;
- Provide for a higher interest rate after default;
- And more as detailed in 1026.32(d).
Section 1026.34 of Reg. Z also details a number of additional requirements related to high-cost mortgages, including requirements to:
- Provide notice to assignees of high-cost mortgage loans of the fact the transaction is considered “high-cost” and subject to the requirements of § 1026.32 and .34;
- Restrict refinancing of the loan of within one year;
- Require the borrower to attend pre-loan counseling;
- Assess the borrower’s repayment ability and more.
HPML APOR
Question: What is “Average Prime Offer Rate”?
Answer: ‘‘Average prime offer rate’’ (APOR) means an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. The Board publishes average prime offer rates for a broad range of types of transactions in a table updated at least weekly as well as the methodology the Board uses to derive these rates.
Question: How do we determine which APOR to use?
Answer: It is critical that creditors select the correct APOR when determining if the loan is an HPML. Creditors are to use the APOR in effect as of the date the interest rate was set the final time. It will be critical this date be clearly documented in the loan file. Creditors are also well advised to develop a procedure for “setting rates” on in-house loans earlier, rather than later, in the loan production process in order to determine if a loan will be deemed a HPML.
Question: Where can I find the APOR tables?
Answer: The APORs are updated each Friday and posted on Monday mornings on the FFIEC website https://www.ffiec.gov/ratespread/newcalc.aspx for loans originated prior to 1/1/18. For loans originated on or after 1/1/18, the calculator can be found at https://ffiec.cfpb.gov/tools/rate-spread. There is a separate link for fixed rate and adjustable rate mortgages.
Question: Do we compare the APOR to the Loan Estimate (LE) or Closing Disclosure (CD) APR?
Answer: The final rule states a creditor must compare the APOR as of the date the final interest rate was set to the APR (not the interest rate, but the Annual Percentage Rate) as disclosed on the Closing Disclosure (CD). This will mean creditors won’t be 100% certain a loan is not an HPML until the CD is produced – typically at least three business days prior to closing. However, creditors may want to test the APR disclosed on the LE to the applicable APOR in an effort to predetermine if the transaction may be subject to HPML coverage. This is for the APR. The rate set date that is used is still determined by the date the bank set the rate for the final time.
Question: We update our rate sheets monthly. Is it possible when we set rates at the beginning of the month, a rate that originally was not a HPML rate could become a HPML later in the month?
Answer: Yes, because the APORs change weekly, creditors will also need to check their rates weekly to determine whether or not the loans are covered transactions.
Question: It is common for us to write a home loan and then later extend credit again secured by the home – for example a home equity loan for the purchase of a vehicle. Both the original home purchase loan and the new home equity loan are secured by an open-end mortgage in a first-lien position. Our home equity loan product is typically priced about 1% above the original home loan rate due to the increased loan-to-value and increased DTI ratio. At the higher home equity rate, the home equity loan APR may very well be above the 1.5% APOR threshold applicable for first liens. Does the 1.5% spread apply to this second loan – or can it be considered a junior lien where the 3.5% spread applies?
Answer: The rate spread in the revised regulation is based upon lien position – not loan purpose. If the regulators had intended to limit the 1.5% threshold to first lien, purchase money or refinance of purchase loans, the regulation would have been written as such. Many creditors may have loans that are made for a purpose other than home purchase or refinance (such as home equity loans used for auto purchase as you suggest or home improvement loans) that will be in a first lien position and will fall under the scope of a HPML due to pricing. If the loan is secured by a mortgage that is in a first-lien position, the loan will be subject to the 1.5% threshold – even if that first lien mortgage secures more than one loan.
Question: Our bank has an existing first-lien mortgage loan for a customer. The same borrower has requested a home equity loan. The bank will file another mortgage secondary to the first it already has in place. Since the bank is both the first and second lien holder, should it use the 1.5% or 3.5% rate spread threshold when determining if this second loan is an HPML? If the bank treats the loan as a “subordinate” lien and uses the 3.5% threshold, is it then safe to assume the loan is not subject to Reg. Z’s escrow provisions for first lien HPMLs? What if the bank was doing this second loan to the customer but referred to an open-end first mortgage large enough to cover both loans as security for the home equity loan? Is the second loan treated as a “first lien” position loan or “subordinate lien” position?
Answer: Under the first scenario where the bank is making a subsequent loan secured only by a junior mortgage, the loan would be considered to be in a subordinate lien position. Thus, for purposes of the HPML rules, the bank should use the 3.5% rate spread threshold. If the loan does meet the definition of an HPML, the bank will NOT be required to escrow as the HPML is in a subordinate, not first lien position.
Under the second scenario where the bank makes a subsequent loan but secures that loan by a first-lien open-end mortgage it has in place, the loan is considered in a first lien position. As such, the 1.5% rate spread threshold would apply and if the loan meets the definition of an HPML, the bank must establish an escrow account prior to closing.
Question: Our bank currently offers 3 and 5 year balloon notes on amortizations of 20 to 30 years. For the purpose of using the calculator, should we consider these loans to be adjustable amortization loans with variable term?
Answer: Balloon loans where the rate is fixed during the term of the loan would be considered fixed-rate loans, not variable rate loans; therefore, you would select Fixed as the amortization type.
Question: What term should be used when the amortization period is longer than the term?
Answer: If the amortization period of a fixed-rate loan is longer than the term of the loan – i.e., because the loan has a balloon feature- the lender should use the maturity term when calculating the rate spread. For example, in the case of a fixed-rate loan that has a five-year term to maturity and a balloon payment because the payments are amortized over 30 years, the term of five years must be used.
HPML Appraisal Requirements
Question: For HPML loans not consummated, are copies of the appraisals developed provided to the consumer?
Answer: Yes. Section 1026.35(c)(6)(ii)(B) states that for loans not consummated, banks must provide the consumer with a copy of each written appraisal obtained in connection with the loan no later than 30 days after the creditor determines that the loan will not be consummated.
Question: Reg. Z, Section 1026.35 covers the requirements for Higher Priced Mortgage Loans (HPMLs). When a consumer purchases a home that is being “flipped,” one of the requirements of this section is to provide the consumer with a second appraisal of the property. If a second appraisal is required, what is the timing requirement for providing the second appraisal to the consumer?
Answer: When an appraisal or a second appraisal is required for an HPML, the timing requirement applies to both appraisals. Section 1026.35(c)(6), “Copy of appraisals” covers all appraisals developed for the transaction. This section goes on to state that a creditor shall provide to the consumer a copy of each written appraisal no later than three business days prior to consummation of the loan.
HPML COVERAGE
Question: What is a “Higher-Priced Mortgage Loan” (HPML)?
Answer: An HPML is a consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the Average Prime Offer Rate for a comparable transaction as of the date the interest rate is set by:
- 1.5% or more percentage points for loans secured by a first lien on a dwelling that does not exceed the limit in effect as of the date the transaction’s interest rate is set for the maximum principle obligation eligible for purchase by Freddie Mac, or
- 2.5% or more percentage points for loans secured by a first lien on a dwelling with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac, or
- 3.5% or more percentage points for loans secured by a subordinate lien on a dwelling.
Question: What loans are most likely to be HPMLs?
Answer: Small mortgage loans with short repayment periods are likely to have higher APRs that may trigger coverage. Also special financing programs such as “Zero Upfront Closing Cost” loans where the creditor covers all closing costs in return for a slightly higher rate may trigger coverage. Construction-perm loans, where the creditor has a higher construction loan interest rate followed by a lower repayment period interest rate, may trigger coverage once the two rates are blended for a composite APR.
Also, creditors typically price loans based on “loan purpose” as well as lien position. However, the HPML rate spread trigger under the final rule is based only on lien position. Thus, creditors may make “home improvement” or “home equity” loans to borrowers who do not have a first mortgage balance owing on their home. In such instances, the creditor may price the loan as a “home equity loan,” but will have to compare the loan’s APR to the first lien rate spread of 1.5%, not the subordinate lien rate spread of 3.5%
Finally, risk-based pricing practices commonly associated with popular credit products may cause some loans to be categorized as HPMLs even if they are made to “prime borrowers”, including “Jumbo” loans and loans with Private Mortgage Insurance (PMI).
Question: Do the requirements for Higher Priced Mortgage Loans (HPMLs) apply to home equity lines of credit (HELOCs)?
Answer: No, only closed-end credit. HPML requirements only apply to closed-end, consumer-purpose credit transactions secured by the borrower’s principal dwelling, for which the loan’s annual percentage rate (APR) exceeds the comparable average prime offer rate (APOR) by a certain threshold. The thresholds are based upon the lien position of the mortgage or if the loan is a jumbo loan. (October 2019)
Question: If a creditor makes a loan that is determined to be an HPML, what is required if no exception applies?
Answer: Creditors who make HPMLs:
- Must establish escrow accounts for taxes and required insurance premiums on for HPMLs in a first lien position; and,
- Must obtain an appraisal by a licensed or certified appraiser that includes an interior inspection of the property. A second appraisal may be required if the property is deemed to be “flipped” as defined in 1026.35(c)(4).
Question: If we make a loan that meets the definition of a HPML, is there an additional disclosure that must be provided to the borrower?
Answer: No. If a creditor makes a loan that meets the definition of a HPML, it is required to verify and document repayment ability using third party sources, obtain an appraisal that includes an interior inspection by a licensed or certified appraiser, and escrow for taxes and insurance if in a first lien position. It is not required to provide the borrower with any sort of additional disclosure.
Question: For determining qualification as a small creditor, please define affiliate. Does this include all banks in a holding company under separate charters?
Answer: “Affiliate” is currently defined at Reg. Z, section 1026.32(b)(5), “any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).” Based on this definition, yes, separate bank charters under common control of a bank holding company are affiliates.
Question: What are the penalties if a creditor violates the HPML rules?
Answer: The Consumer Financial Protection Bureau (CFPB) is allowed to regulate unfair or abusive practices under TILA, section 129(l)(2). The rules made under this section of TILA carry enhanced liability implications, including CMPs and administrative enforcement action. Penalties fall under 5 categories:
- Actual damages;
- Statutory damages ranging from not less than $400 or greater than $4,000;
- Special damages for class action challenges up to a maximum that cannot exceed the lesser of $500,000 or 1% of net worth of creditor;
- Specific damages for failure to comply with section 129 in an amount equal to the sum of all finance charges and fees paid by the borrower, unless the creditor demonstrates that failure to comply is not material with no cap; and
- Right of rescission claims provide borrowers three years to discover a breach of the new prepayment penalty provisions for higher priced mortgage loans. If a breach is found, the borrower can rescind the loan and the creditor will be liable for costs of the action, together with reasonable attorney fees as determined by a court.
Question: Do the requirements for Higher Priced Mortgage Loans (HPMLs) apply to home equity lines of credit (HELOCs)?
Answer: No, only closed-end credit. HPML requirements only apply to closed-end, consumer-purpose credit transactions secured by the borrower’s principal dwelling, for which the loan’s annual percentage rate (APR) exceeds the comparable average prime offer rate (APOR) by a certain threshold. The thresholds are based upon the lien position of the mortgage or if the loan is a jumbo loan. (October 2019)
HPML ESCROW
Question: If we are making a subordinate lien loan that meets the HPML requirements that is secured by an open-end mortgage in a first lien position, do we need to setup up an escrow account?
Answer: If the borrower is already escrowing on the first loan, the escrow provision becomes a moot point. An escrow account is in place and thus, the requirement is satisfied. If an escrow account is not in place, one will need to be established with this new loan. The bank may want to consider executing a true second mortgage to take advantage of the higher rate spread of 3.5% applicable to second lien loans.
Question: If we allow as few as two customers to escrow and the escrow accounts were not required due to HPML status, would that be enough to exclude us from the escrow exemption?
Answer: Yes, any escrow, other than the required HPML escrow under Reg. Z section 1026.35 or an escrow established as an accommodation for a distressed borrower, causes the creditor to be ineligible for this exemption, UNLESS the creditor discontinues such escrows before January 1, 2014.
Question: How long must the escrow account be maintained?
Answer: A creditor or servicer may cancel a required escrow account only upon the earlier of:
- Termination of the underlying debt obligation; or
- Receipt no earlier than five years after consummation of a consumer’s request to cancel the escrow account.
In addition, a creditor is not permitted to cancel an escrow account upon a consumer’s request after five years from consummation unless the following conditions are satisfied:
- The unpaid principal balance is less than 80 percent of the original value of the property securing the underlying debt obligation; and
- The consumer currently is not delinquent or in default on the underlying debt obligation.
Question: If a creditor makes an HPML secured by a subordinate lien and the customer does not escrow on the first mortgage, would the creditor be required to establish an escrow account on the subordinate lien loan?
Answer: No – creditors are only required to escrow if the extension of credit meets the definition of an HPML and is in a first-lien position. Subordinate lien mortgage loans are not covered by the escrow provision.
Question: Our bank qualifies for the small-rural creditor exemption. If we understand the situation, we can charge more than 1.5 percent over a comparable APOR and not be required to escrow. Is that correct?
Answer: That is correct. However, be aware other provisions of the Dodd-Frank Act impose additional requirements and restrictions on loans that meet the definition of an HPML – such as requiring an appraisal by a state certified or licensed appraiser with interior inspection of the property. So while this exemption may provide some much needed regulatory relief from the escrow requirement, be aware other new HPML requirements may apply.
Question: Are creditors required to pay interest on escrow account balances?
Answer: State chartered banks are required to pay interest on escrow account balances in an amount at least equal to their savings rate. National banks and thrifts are not covered by this state law requirement found in Iowa Code chapter 524.905(2).