Checking for HOEPA Loans

The new rules on HOEPA, or high-cost loans, took effect on October 1, 2002. The zinger on HOEPA loans is that you need to know whether you make them before you make them so that you can comply with the pre-closing disclosure and waiting period. Then there are also the usual questions of whether the disclosures were correct and required procedures were actually followed.

Whether you think you make HOEPA loans or not (and your lenders will always tell you they don't), you should periodically review your loan files as well as application and underwriting procedures to be sure. If you find nothing, you can sleep well that night. However, if your audit reveals HOEPA loans or close-to-HOEPA loans, you should take action the establish pre-closing compliance procedures. Think of this audit as preventative health care. Like good preventative health care, do regular check-ups to make sure everything is really OK.

HOEPA Audit, Part I
There are two triggers for HOEPA, one based on the APR and the other on total fees and charges. Potential loans must be measured against both triggers. If either trigger is set off, the loan is covered by HOEPA and you must prepare and deliver the special disclosures. Put another way, if either shoe fits, wear it. We enclose a form that walks the lender through all the tedious steps of the high-cost evaluation. If you would prefer using an automated version, see the Bankers' Tools section of www.BankersOnline.com.

Check loan fees and APRs against HOEPA triggers on a quarterly basis. Select loans from home improvement loans, refinances, and other non-purchase dwelling secured loans. Be sure to check every portfolio that could contain HOEPA loans.
Give special attention to loans having balloon payments, payment caps that could result in negative amortization, and demand features of any kind and rate increase of acceleration clauses.
Evaluate the documentation of all loans for content and completeness. Be sure that the borrower's income was verified and that the loan does not exceed 50% of the borrower's verified gross monthly income.

HOEPA Audit, Part II
The other part of a HOEPA audit is to review loan terms and look for any prohibited terms or clauses in the loan contract. This means reading the notes carefully. If you use a single note form, reading one will constitute reading them all - but only if you are confident that no one in lending or settlement had the urge to get creative. We review all files to include a check that the standard note form was in fact used. This helps to identify any aberrant situations quickly so that attention can be focused on them.

It is also a good idea to perform a forms review before the new rules take effect. That way you can identify potential problems early and make changes to loan terms and products to avoid making HOEPA loans.

Review loan documents for any of the prohibited clauses or practices. If these clauses are used anywhere in your institution's credit agreements, run a thorough check for HOEPA loans. In fact, share a check list with lenders. Use it in training and send them back to work with the checklist as a constant reminder.

Review the age of loans that are refinanced to be sure that the loan being refinanced is more than one year old. Any refinancings, whether for loans originated by your institution or another lender, should indicate the age and terms of the loan being refinanced.
Check scheduled payments against principal balance to be sure that there is no negative amortization. Also check any payment increase caps that could be triggered by a sudden rate increase.
Review the settlement documents and determine whether any charges or fees were imposed violating HOEPA, including advance payments (more than two if the loan is subject to HOEPA), and prepayment penalties for more than five years.
If there are prepayment penalties, determine that the calculation method for the penalty is permitted by HOEPA.
Review the loan contracts for default provisions. Rates may not be increased if the loan meets the Section 32 test nor may an acceleration clause be exercised.
Review HOEPA disclosures for any required content, including the customer's warning that they are not obligated to complete the credit transaction.
If you have any high-cost loans, review the notes to be sure that they contain the notice to third parties that preserve the borrower's claims and defenses.
Check home improvement loan advances for payment to both borrower and contractor or to a designated escrow agent.

Click here to access the High-Cost Mortgage Test Checklist

Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 7, No. 12, 10/02