Williams Mullen

BY: EDMUND D. HARLLEE

On January 31, the Bureau of Consumer Financial Protection (the “Bureau”) published final rules in the Federal Register amending its Regulation Z (Truth in Lending) and Regulation X (Real Estate Settlement Procedures Act) to implement the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) with respect to mortgage loans subject to the Home Ownership and Equity Protection Act of 1994 (“HOEPA”).  Proposed rules on this topic were reported in this publication on August 28, 2012.

HOEPA was enacted in 1994 to address abusive practices in refinancing loans and home-equity loans having high interest rates or high fees.   Loans covered by HOEPA are subject to special disclosure requirements and substantive restrictions on loan terms.  Borrowers under these loans are also given enhanced remedies for violations of the statute. 

The final rule amends the above regulations in several ways:

1.         Expansion of Coverage under HOEPA.  Under the final rules, most types of mortgage loans secured by a consumer’s principal dwelling are potentially subject to HOEPA coverage.  If covered, and any of the high rate/high fees “coverage tests” described in Paragraph 2 below are met, the loan will be subject to the disclosure requirements and enhanced remedies under HOEPA, as well as the additional requirements described in Paragraph 3, below.

The final rules retain the existing exemption for reverse mortgages, and add exemptions for initial construction loans, loans originated and financed by the Housing Finance Agencies, and loans originated through the USDA’s Rural Housing Service Section 502 Direct Loan Program.

2.         Coverage Tests.  Under the final rules, HOEPA high-cost triggers have been enhanced.  HOEPA protections would be triggered where:

• The loan’s annual percentage rate (“APR”) exceeds the average prime offer rate by 6.5% for most first-lien loans, or by more than 8.5% for a first mortgage loan where the dwelling is personal property and the loan is for less than $50,000.
• The loan’s APR exceeds the average prime offer rate by 8.5% for subordinate lien loans
• The loan’s points and fees exceed 5% of the total transaction amount, or, for loans of under $20,000, exceeds the lesser of 8.0% or $1,000 (the above dollar figures to be adjusted annually for inflation).
• The lender may charge a prepayment penalty of more than 2% of the amount prepaid, or a prepayment penalty may be imposed more than 36 months after closing.

3.         Additional Restrictions on Loans.  Under the final rules, high-cost loans subject to HOEPA have to meet the following additional requirements:

• Balloon payments are prohibited, with certain exceptions.
• Prepayment penalties and the financing of points and fees are prohibited.
• Late fees are restricted to 4%.
• Fees for providing payoff statements are restricted.
• Fees for loan modification or loan deferral are prohibited.
• Lenders under open-end credit plans are required to assess the borrower’s ability to repay.  Lenders under high-cost closed-end loans are currently required to make this assessment (as reported in this publication on January 29, 2013).
• Lenders and mortgage brokers are prohibited from encouraging borrowers to default on debts to be refinanced with a high-cost mortgage loan.
• Before making the loan, lenders are required to obtain confirmation from a federally certified or approved homeownership counselor that the consumer has received counseling on the advisability of the loan.
• Lenders are required to provide to consumer borrowers a list of federally certified or approved homeownership counselors or organizations within 3 business days after receiving an application for a mortgage loan.  The list is to be obtained by the lender from the Bureau or from the Department of Housing and Urban Development.
• Lenders are required to obtain a confirmation that a first-time consumer borrower has received homeownership counseling from a federally certified or approved homeownership counselor or organization, before they make a negatively amortizing loan to the borrower.

The final rules are effective January 10, 2014