On January 10, 2013, the CFPB issued a final rule to implement changes the Dodd-Frank Act made to the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) with regard to “high-cost” HOEPA loans (Final Rule). The Dodd-Frank Act significantly amended HOEPA to expand the types of loans potentially subject to HOEPA coverage, to revise the triggers for HOEPA coverage, and to strengthen and expand the restrictions that HOEPA imposes on high-cost mortgages. The Dodd-Frank Act also amended RESPA by imposing certain requirements related to homeownership counseling. The Final Rule is effective January 10, 2014.
Scope of HOEPA Coverage
The Final Rule expands the potential applicability of the HOEPA requirements to most types of mortgages secured by a consumer’s principal dwelling, including purchase-money mortgages, refinances, closed-end home equity loans, and open–end credit plans (i.e., home equity lines of credit or HELOCs). The Final Rule retains the existing exemption from HOEPA coverage for reverse mortgages. In addition, the Final Rule adds exemptions from HOEPA coverage for three types of loans that the CFPB believes do not present the same risk of abuse as other mortgage loans: (1) loans to finance the initial construction of a dwelling, (2) loans originated and financed by Housing Finance Agencies, and (3) loans originated through the United States Department of Agriculture’s (USDA) Rural Housing Service section 502 Direct Loan Program.
Revised HOEPA Triggers
The Final Rule implements the Dodd-Frank Act revisions to HOEPA coverage tests. Currently, a loan is subject to HOEPA requirements if (1) the APR at consummation exceeds by more than 8 percentage points for first-lien loans, or more than 10 percentage points for subordinate-lien loans, the yield on Treasury securities with comparable maturities, or (2) the total points and fees payable by the consumer at or before closing exceed the greater of 8% of the total loan amount or a floating amount (for 2012, $611).
Under the Final Rule, the HOEPA triggers would be lowered as follows:
- The transaction’s APR at consummation exceeds the average prime offer rate (APOR) for a comparable transaction, not the yield on Treasury securities, by:
- More than 6.5 percentage points for first lien loans (8.5 percentage points if the dwelling is personal property and the total transaction amount is less than $50,000); or
- More than 8.5 percentage points for subordinate-lien loans.
- The transaction’s total points and fees (other than bona fide third party charges not retained by the mortgage originator, creditor, or an affiliate of either) would exceed:
- 5% of the “total transaction amount” (reflecting the new applicability of the HOEPA requirements to both closed-end and open-end credit transactions) for transactions of $20,000 or more or
- The lesser of 8% or $1,000 (adjusted for inflation) for transactions of less than $20,000.
- The transaction provides for prepayment fees and penalties that:
- May be imposed more than 36 months after consummation or account opening; or
- Exceed, in the aggregate, more than 2 percent of the amount prepaid.
The Final Rule provides guidance on applying the various coverage tests, such as how to calculate points and fees or determine the average prime offer rate. For example, a charge is included in points and fees for a closed-end loan only if it is known at or before consummation that the consumer will incur the charge. For open-end credit plans, points and fees includes loan originator compensation and participation fees payable at or before account opening. In addition, the Final Rule requires use of the fully indexed rate (rather than the maximum allowable rate) in calculating the APR for certain variable-rate transactions. See our summary of the Ability to Repay Final Rules for further discussion of points and fees and prepayment penalties requirements.
Expanded Definition of Finance Charge
The CFPB is aware that if proposed revisions to the definition of finance charge are enacted in its TILA-RESPA Integrated Disclosure Proposal, more loans would automatically become HOEPA loans by virtue of the revised triggers. In the CFPB’s HOEPA Proposed Rule, the CFPB sought comment on whether to adopt certain adjustments or mitigating measures in its HOEPA implementing regulations if the CFPB were to adopt a broader definition of finance charge under Regulation Z. See 77 Fed. Reg. 49090, (August 15, 2012). Specifically, the CFPB proposed to substitute a “transaction coverage rate” for the APR as the metric to be compared to the average prime offer rate for closed-end credit transaction in order to compensate for the broader definition of finance charge. The transaction coverage rate would be determined in accordance with the applicable rules for the calculation of the APR for a closed-end transaction, except that the prepaid finance charge would include only charges that would be retained by the creditor, a mortgage broker, or an affiliate of either.
However, the Final Rule provides that the CFPB will defer its decision on whether to adopt the more inclusive finance charge proposal and any related adjustments to HOEPA or other regulatory thresholds until it finalizes the TILA-RESPA Integrated Disclosure Proposal, which is planned for later in 2013. In addition, the CFPB noted that it would not adopt the alternative transaction coverage rate if it did not adopt the more inclusive definition of finance charge. As a result, the CFPB does not address the numerous public comments that it received concerning the proposed alternatives for the APR coverage test in the Final Rule. The CFPB will instead address such comments in connection with its finalization of the 2012 TILA-RESPA Integrated Disclosure Proposal.
Restrictions on Loan Terms and Counseling-Related Requirements
The Final Rule implements Dodd-Frank Act revisions to the HOEPA restrictions and requirements on loan terms and origination practices for high-cost loans, including the following:
- General ban on balloon payments unless they are to account for the seasonal or irregular income of the borrower, they are part of a short-term bridge loan, or they are made by creditors meeting specified criteria, including operating predominately in rural or underserved areas.
- Prohibition on charging prepayment penalties and financing points and fees.
- Restrictions on late fees to 4% of the amount that is past due.
- Restrictions on fees for providing payoff statements.
- Prohibition on fees for loan modifications and loan deferrals.
- Ability to repay assessments for open-end credit plans.
- Prohibition on recommending or encouraging a consumer to default on a loan or debt to be refinanced by a high-cost mortgage.
- Before making a high-cost mortgage, requirement to obtain confirmation from a federally certified or approved homeownership counselor that the consumer has received counseling on the advisability of the mortgage.
The Final Rule also implements counseling requirements that do not depend on HOEPA applicability. The Final Rule requires lenders to provide a list of homeownership counseling organizations to consumers within 3 business days after a consumer applies for a mortgage loan. Lenders are required to obtain the list from either a website that the CFPB will develop or data that will be made available by the CFPB and HUD. Reverse mortgages and mortgage loans secured by a timeshare are exempted from the list requirement.
The Final Rule also implements a new requirement under TILA that creditors must obtain confirmation that a first-time borrower has received homeownership counseling from a federally certified or approved homeownership counselor or counseling organization before making a loan that provides for or permits negative amortization to the borrower.