HOEPA Status
 

RESOURCES

HOEPA Status

In addition to requiring lenders to report the rate spread on certain loans, the amendments to Regulation C require for the first time that lenders report whether a loan is covered by the provisions of the Home Ownership and Equity Protection Act Amendments (HOEPA), implemented by Regulation Z in Sections 32 and 34. HOEPA loans are also referred to as “high-cost mortgages.” The reporting of HOEPA status is part of the required reporting of pricing data.

Did you know?
HOEPA covers closed-end loans secured by the borrower's principal residence, other than home purchase loans, with rates or fees above certain thresholds or “triggers.” HOEPA has an APR trigger and a points and fees trigger.

The amendments to Regulation C are intended to identify HOEPA loans. A loan is reportable as a HOEPA loan if:

First-Lien Mortgage

APR triggers:
The APR at consummation exceeds the yield for comparable Treasury securities by more than 8 percentage points.

or

Points and fees trigger:
The total points and fees paid by the consumer exceed the greater of 8 percent of the loan amount or a set dollar amount ($499 for 2004). The exact dollar amount is adjusted annually, based on the Consumer Price Index. The fee-based trigger was recently amended by the Board to include amounts paid at closing for optional credit life, accident, health or loss-of-income insurance; and for other debt-protection products written in connection with the credit transition.

Subordinate-Lien Mortgage

APR triggers:
The APR at consummation exceeds the yield for comparable Treasury securities by more than 10 percentage points.

or

Points and fees trigger:
The total points and fees paid by the consumer exceed the greater of 8 percent of the loan amount or a set dollar amount ($499 for 2004). The exact dollar amount is adjusted annually, based on the Consumer Price Index. The fee-based trigger includes amounts paid at closing for optional credit life, accident, health or loss-of-income insurance; and for other debt-protection products written in connection with the credit transition.

 

Reasons for Change
Obtaining HOEPA status on loans is critical to address fair-lending concerns related to loan pricing and to better understand the mortgage market, including the subprime market. Since the mid-1990s, the subprime mortgage market has grown substantially, providing access to credit for borrowers with less-than-perfect credit histories and to other borrowers who are not served by prime lenders. Along with the growth in the subprime market, there have come increased variations in loan pricing and increased reports of “predatory lending,” which covers a variety of lending practices. Although there is no generally accepted definition of “predatory lending,” the term is used to refer to abusive lending practices involving fraud, deception or unfairness.

Is the Loan a Covered Loan?
To determine if the APR exceeds the established thresholds, lenders must continue to use the Federal Reserve Board's statistical release H.15 table, Selected Interest Rates. Lenders should use the 15th of the month before the month in which the application was received to identify the appropriate Treasury security yield.

Did you know?
Remember, for the rate spread calculations, lenders are required to use only the Treasury yields published on the FFIEC web site. HOEPA will continue to require lenders to use the H.15 Treasury yields.

Relationship to Regulation Z - Truth in Lending
Effective Oct. 1, 2002, amendments were adopted to the provisions of Regulation Z that implement HOEPA. The amendments to Regulation Z broadened the scope of mortgage loans subject to HOEPA by adjusting the price triggers used to determine coverage under the act. The APR trigger was lowered by two percentage points for first-lien mortgage loans, from 10 to 8 percentage points. The points and fee-based trigger was revised to include the cost of optional credit insurance and similar debt protection products paid at closing.

Did you know?
For additional reference materials for HOEPA and additional amendments to Regulation Z, see the revised examination procedures for the Truth in Lending Act (TILA), which were approved by the FFIEC. The examination procedures can be used as a tool to review an institution's policies and procedures. Special attention should be directed to the worksheets at the end of the document that can be used to determine if a transaction is covered by HOEPA requirements. The “ High-Cost Mortgage Worksheets” are excellent tools for determining if points and fees will identify a mortgage as a covered transaction.

Reporting HOEPA Status on the HMDA-LAR
See the "HOEPA status" field on the LAR and the codes to be used for filling it out.

For reporting purposes, HMDA reporters will use the following codes on the HMDA-LAR:

Code 1 – For loans that a lender originates or purchases that are subject to HOEPA restrictions because the APR or the points and fees on the loan exceed the applicable HOEPA triggers.

Code 2 – For all other loans.

Did you know?
Because HOEPA coverage is based not only on the APR but also on points and fees charged by the lender, some loans are covered only because of the fees charged. In many instances, the amount of premiums for credit life insurance will trigger HOEPA coverage. Industry comments, received during the Board's comment period on amendments to Regulation C, indicated roughly 30 percent of first-lien loans and 23 percent of the subordinate- lien loans are covered by HOEPA only because of the points and fees on the loans. Reporters need to ensure that systems are in place to capture both pieces of information: points/fees and APR.

The following examples provide practical guidance for determining if a loan is a HOEPA-covered transaction.

EXAMPLE ONE: APR

FACTS: Kerry and Mike Davis contact Second Street Bank to obtain rates for a closed-end home-equity loan for new windows for their home. They have paid off their mortgage, and no other outstanding debts are associated with the residence. The amount requested is $6,000. The lender quotes an interest rate of 11 percent for a term of five years. The lender receives the loan application on April 14 and originates the loan on May 1. Based on the lender's terms and conditions, the corresponding APR is 12 percent and total points and fees are $300.

QUESTION

Is the loan covered by HOEPA?

ANSWER

To determine if a particular loan exceeds the HOEPA APR trigger, the lender must compare the APR to the yield on Treasury securities with comparable periods of maturity to the loan term. For comparison purposes, the lender must reference yields from the Federal Reserve's H.15 release as of the 15th day of the month immediately preceding the month in which the application was received. For this example, the appropriate release to use would be the one from March 15 since the application was received on April 14. Assume that the comparable yield is 3 percent.

The difference between the disclosed APR of 12 percent and the comparable yield of 3 percent is 9 percentage points. This loan is covered by HOEPA because the APR exceeds the 8 percent rate trigger for first-lien mortgages. Second Street Bank would report the loan using Code 1 in the HOEPA status field.

 

EXAMPLE TWO: POINTS AND FEES

FACTS: Leonard and Wilma Dove contact Pine Bluff State Bank to obtain rates for a closed-end home-equity loan for new windows for their home. They have paid off their mortgage, and no other outstanding debts are associated with the residence. The amount requested is $6,000. The lender quotes them an interest rate of 9 percent for a five-year term and receives an application on Nov. 14 and originates on Dec. 1. Based on the lender's terms and conditions, the corresponding APR is 10 percent and total points and fees equal $508.

QUESTION

Is this loan covered by HOEPA?

ANSWER

The lender must reference the Oct. 15 H.15 to determine if the loan exceeds the APR trigger since the application was received Nov. 14. For this example, assume the appropriate yield is 3 percent. The APR does not exceed the APR trigger. However, the lender should determine if the loan exceeds the points and fees trigger. The points and fees for this transaction total $508. The total exceeds 8 percent of the loan amount and the set dollar amount of $499. Therefore, this loan is covered by HOEPA. Pine Bluff State Bank would report the loan using Code 1 in the HOEPA status field.