A loan is covered by HOEPA if it meets the following criteria:
- for the original mortgage on the property, the annual percentage rate (APR) exceeds the rates on Treasury securities of comparable maturity by more than eight percentage points;
- for a second mortgage, the APR exceeds the rates on Treasury securities of comparable maturity by more than 10 percentage points; or
- the total fees and points payable by the borrower at or before closing exceed the larger of $625 or eight percent of the total loan amount.
(The $625 figure is for 2013. This amount is adjusted annually by the Consumer Financial Protection Bureau, based on changes in the Consumer Price Index.)
- Credit insurance premiums written in connection with the transaction are counted as fees.
- HOEPA does not cover loans to buy or build your home, reverse mortgages, or home equity lines of credit.
Disclosure Requirements of HOEPA
If your loan meets the HOEPA criteria, the lender must give you several disclosures at least three business days before closing on the loan:
- A written notice stating that the loan does not need to be finalized, even though you’ve signed the application and received the required disclosures. You have three business days to decide whether to sign the loan agreement after you receive the Section 32 disclosures.
- The notice must warn you that, because the lender will have a mortgage on your home, you could lose the residence and any money you put into it if you don’t make the payments.
- The APR, the regular payment amount (including any balloon payment), and, in a mortgage refinancing, the loan amount (plus when the amount borrowed includes credit insurance premiums, that fact must be stated). For variable rate loans, the lender must disclose that the rate and monthly payment may increase, and the amount of the maximum monthly payment.
Banned Features of HOEPA
High-rate, high-fee loans ban the following:
Balloon payments — when the regular payments do not pay off the principal balance and a lump sum payment of more than twice the amount of the regular payments is required — for loans with less than five-year terms. One exception: Balloon payments for bridge loans of less than one year that are used to buy or build a home are allowed.
Negative amortization: — an increase in the balance of a loan caused by adding unpaid interest to the loan balance. This occurs when the regularly scheduled payment does not cover the interest due.
- Default interest rates that are higher than pre-default rates.
- Rebates of interest upon default that are calculated by any method less favorable than the actuarial method.
- A repayment schedule that consolidates more than two regularly scheduled payments that are to be paid in advance from the proceeds of the loan.
- Most prepayment penalties, including refunds of unearned interest calculated by any method less favorable than the actuarial method.
The exception is if:
- the lender verifies that your total monthly debt (including the mortgage)
- is 50 percent or less of your monthly gross income;
- you get the money to prepay the loan from a source other than the lender or an affiliate lender;
- the lender exercises the penalty clause during the first two years after the start of the mortgage;
- the amount of the regularly scheduled payment for principal and interest cannot change during the first four years after the start of the loan.
A due-on-demand clause, except if:
- you commit fraud or deliberately hide or falsify facts related to the loan;
- you don’t repay the loan according to the terms of the agreement; or
- you take any action that adversely affects the creditor’s security.
Mortgage Lenders also may not:
- make loans based on the collateral value of your property without considering your ability to repay the loan as of the start of the loan, including your current and reasonably expected income, employment, assets other than the collateral, and current obligations (including those related to mortgages). In addition, proceeds for home improvement loans must be disbursed directly to you, jointly to you and the home improvement contractor or, in some instances, to the escrow agent.
- refinance a HOEPA loan into another HOEPA loan within the first 12 months of origination, unless the new loan is in your best interest. This rule also applies to assignees (persons or entities) holding or servicing the loan.
- wrongfully document a closed-end, high-cost loan as an open-end loan. For example, a high-cost mortgage may not be structured as a home equity line of credit if there is no reasonable expectation that additional transactions will occur.
CFPB changes threshold limits for HOEPA exclusion
The Homeownership Equity Protection Act under Regulation Z of the Truth-in Lending-Act forces creditors to comply with certain guidelines and disclosure requirements when a loan is tied to certain types of home purchases. But there are exemptions for loans that meet certain requirements, and the CFPB revised some of the threshold requirements that have to be met for HOEPA guidelines to apply.
HOEPA rules previously applied to loans backed by homes when the total points and fees paid by the customer at or before loan consummation were greater than $400 or 8% of the total loan amount, the CFPB explained. In such a case, additional HOEPA protections for borrowers would apply.
However, the CFPB as part of a series of threshold changes on lending provisions noted this week that the bureau is adjusting the $400-threshold to $625 based on the annual percentage change in the consumer price index. The rule went into effect on Jan. 1, 2013.
Mortgage Acts and Practices FTC
The MAP Rule "prohibits any material misrepresentation, whether made expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product." 76 FR 43833. The Rule adopts the FTC’s standing definition of a deceptive act as occurring "if there is a material representation, omission or practice that is likely to mislead consumers acting reasonably under the circumstances, where the information is material if it is likely to affect a consumer’s choice of, or conduct regarding, a product." 76 FR 43826.
Section 321.3 of the MAP Rule outlines a list of 19 areas in which mortgage advertising misrepresentations have been prevalent and in which false or deceptive claims would result in Rule violation. This listing is not meant to be all encompassing but meant to instead "provide clarity and guidance" in determining a deceptive misrepresentation under the Rule. 76 FR 43833. The list includes misrepresentations regarding loan terms, fees and costs, the consumer’s potential for savings or approval and additional services or affiliated providers.
MAP Rule examples arising under the Loan Terms category include misrepresentations regarding:
- The interest charged for a mortgage credit product.
This section explains that interest misrepresentations include the total amount owed each month, be it included in the payments, loan amount or total amount due, well as the interest owed each month that is not included in the payments, but instead is added to the total amount due. (321.3(a))
- The APR, simple annual rate, period rate or any other rate, including payment rate.
In the Discussion of the Final Rule, the FTC indicated that there has been an increase in deceptive rate claims and included an example of claims which had arisen where originators understated the true rate by more than 100 percent. (321.3(b))
This section includes misrepresentations concerning not only the existence of a pre-payment penalty but also the nature, amount or terms. (321.3(f))
- The variability of interest, payments or other terms.
Under this section use of word "fixed" will not be allowed when the interest, payments or other terms are actually variable or will only stay unchanged for a limited amount of time. (321.3(g))
- The type of mortgage credit product offered.
This section gives the example of a misleading claim that the product offered is fully amortizing when it is not. (321.3(i))
- The potential for default.
Consumers must be made aware that the potential for default includes not only mortgage nonpayment default, but also potential default for nonpayment of taxes or insurance, failure to maintain the property or default as a result of not meeting other required obligations. (321.3(l))
- The right to reside in the subject dwelling.
The right to reside in the home arises as an issue when the product is a reverse mortgage and there are misrepresentations as to how long and under what conditions a consumer will be able to live in the home. (321.3(p))
Examples of deceptive claims relating to Fees and Costs under the MAP Rule include misrepresentations about:
- The existence, nature or amount of fees or costs associated with any mortgage credit product.
A statement cannot be made that there will be no fees charged, when in fact the fees and costs will be incorporated in the loan amount or total amount due from the consumer. The fees charged include any fees collected over the life of the loan, not just at origination. (321.3(c))
- The taxes or insurance associated with a mortgage credit product.
The terms, amounts and payments of taxes or insurance requirements may not be misrepresented. Specifically, the requirements for tax and insurance payments to be included consumer’s monthly mortgage payments and the extent to which the tax and insurance payment will be included in the loan amount or total amount due from the consumer. (321.3(e))
- The consumer’s ability to obtain any mortgage product or term.
Misrepresentations under this section include claims that the consumer has been pre-approved or guaranteed for any product or term. (321.3(q))
- The consumer’s ability to refinance or modification of any mortgage product or term.
Misrepresentations under this section include claims that the consumer has been pre-approved or guaranteed for any refinancing or modification. (321.3(r))
Deceptive claims as to Payments and Consumer Savings under the MAP Rule include misrepresentations regarding:
- Comparison between rates or payments.
This section includes false and misleading comparisons using a rate or payment that will not be available for the full term of the loan and also any deceptive claims that consumers will save money by accepting a credit offer. (321.3(h))
- The amount of the obligation or existence, nature, or amount of cash or credit the consumer would receive from the loan.
The examples provided for this section include false claims that the consumer will receive an amount of cash by obtaining HELOC or receive a credit through a purchase money loan. (321.3(j))
- The existence, number or amount of timing of any minimum or required payments.
In the case of reverse mortgage where there is no monthly mortgage payment but there are taxes and insurance payments required, it may not be advertised as having no payments without clear clarification. (321.3(k))
- The effectiveness of a product in helping consumers resolve problems paying debts.
This section includes false or misleading claims that a product can reduce, eliminate or restructure a debt or any other obligation. (321.3(m))
Misrepresentations regarding Additional Products or Services offered and Affiliated Services, optional or otherwise, include:
- The terms associated with additional products or features sold along with the mortgage credit product.
This section includes false claims regarding credit insurance, credit disability insurance, car loans or other additional optional features. (321.3(d))
- The association between the mortgage credit product or provider and any other person or program.
Misrepresentations under this section include false claims that the provider is or is affiliated with any organizational or government program, benefit or entity. Also included are misrepresentations by using logos, forms or symbols that resemble those used by other entities, organizations or programs which the product is not, or for which the provider is not affiliated. The Final Rule Discussion clarifies that government logos may be used as required or allowed, including advertising FHA programs if they are offered. (321.3(n))
- The source of commercial communications.
This section includes false claims that the communication with the consumer is made by or on behalf of the consumer’s current mortgage lender or servicer. (321.3(o))
- The availability, nature or substance of counseling services or any other expert advice offered to the consumer.
A deceptive claim regarding the qualifications of those providing services under this section is not allowed. However, this section does not prohibit truthful, non-deceptive references to valid professional designations. (321.3(s))
The prohibited acts and practices as described above, arise from numerous FTC enforcement actions and trends that have emerged in advertising practices found to be misleading to consumers.
In ensuring MAP Rule compliance, it should be noted that only false or misleading advertising under the 19 above examples are prohibited. The rule does not prohibit advertising using these 19 items in advertising as long they are not used deceptively or falsely. For example, if a mortgage lender offers a certain desirable loan program, they may advertise as such. If a mortgage lender chooses to use a disclaimer to clarify an advertisement claim, it must shown as clearly and conspicuously as the claim itself.
The FTC’s Final MAP Rule may be viewed online.