I'm nost sure that it is possible to provide a "simplfied" summary of the HOEPA changes, but here is how we put it in a recent newsletter:
With the intent of further curbing predatory lending, Regulation Z has recently been amended. Specifically, the amendments pertain to the requirements set forth in the Home Ownership and Equity Protection Act (HOEPA). We like to pronounce it “HoEPa” with emphasis on the “e” (not to be confused with HOPA which has to do with PMI).
HOEPA is implemented in section 226.32 of Regulation Z (Truth in Lending) and, is therefore, also known as “section 32.” Until these amendments were made, most (if not all) loans made by your institution have not previously fallen under these guidelines. Many of you may be surprised to find out that this section of Regulation Z even exists.
So what types of loans will potentially be affected? The first requirement depends on the purpose of the loan. HOEPA applies to any loan made to a consumer which is secured by the consumer’s principal dwelling. It does not apply to residential mortgage transactions (purchase, construction loans or construction to permanent financing) or to openended credit (HELOCs). The most common loan types that are affected are refinances, home equity loans and home improvement loans.
How does the loan become subject to HOEPA? HOEPA pertains to a loan if either of the following two conditions are met:1) The APR is 8% (first lien loans) or 10% (junior lien loans) greater than a treasury security which has a comparable maturity as of the 15th of the month prior to the month the application is received.
The Federal Reserve publishes the yield on Treasury securities in a report called H15. These releases can be found at: http://www.federalreserve.gov/releases/h15/. You will need to check your APR to these rates before closing to see if your loan qualifies.
2) The total points and fees payable at or before loan consummation exceed 8% of the total loan amount (amount financed minus points and fees), or $400. This dollar limit will be adjusted annually and is $480 for 2002. One thing to note; however, is that the definitions of what constitutes points and fees for HOEPA will not necessarily be the same as determining the finance charge.
Simply put (just kidding of course!), if the bank or an affiliate of the bank (control or ownership of 25% or more) retains all or a portion of any fee charged to a borrower, it would be included when determining total points and fees payable under HOEPA. Some common fees that would need to be included are:
- Points, loan fees, origination fees;
- Appraisals fees (conducted internally);
- Credit life/disability premiums;
- Yield Spread Premiums or Service Release Premiums;
- All mortgage broker compensation;
- Title insurance, examination, abstract, etc. (if an affiliate);
- Document preparation fees;
So, what do you need to do if you determine you have a loan subject to HOEPA? A lender must provide a disclosure to the borrower 3 days prior to closing. This time period can be waived or modified, much like the right of rescission, but there must be a bona fide, financial emergency.
The disclosure must state:
- the APR,
- the amount of the borrower’s monthly payment,
- the amount of any balloon payment.
- Variable rate transactions must include a statement that the interest rate and monthly payment may increase and the maximum payment that could be reached;
- Refinancing transactions must state the total amount borrowed and if the loan amount includes premiums or other charges for optional credit insurance or debt cancellation coverage, that fact shall be stated.
And the following information, as applicable:
The disclosure must also include a statement similar to the following: You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.Most likely, you will not have many loans covered by HOEPA, but you need to be aware of the requirements and when it is triggered. Be careful of the small home equity loans ($5000) where you also sell credit life and/or disability insurance. These can easily trigger the HOEPA disclosures.
First published on BankersOnline.com 7/1/02