Home Ownership and Equity Protection Act (HOEPA)

Since many states rely on HOEPA to define predatory lending in their own statutes, it’s important to understand the federal law and its basic structure. The first thing to know is that HOEPA only applies to certain refinance loans; it does not apply to mortgages taken in conjunction with the purchase of a home. HOEPA establishes two “thresholds,” which determine whether a loan comes under the act or not. A loan is subject to the act if:

1. its annual percentage rate exceeds the T-Bill rate for loans with a comparable term by more than eight percent (ten percent if the loan is a junior lien mortgage); and
2. total fees and points payable by the consumer at or before closing exceed the larger of $561 or eight percent of the total loan amount. Which charges get counted as points and fees is spelled out in section 32 of Regulation Z, which is where HOEPA’s nickname—Section 32—originates.

HOEPA and Section 32 impose restrictions and additional disclosure requirements on lenders and servicers of loans that meet the two thresholds. Most lenders avoid originating Section 32 loans because they aren’t marketable. On the other hand, many “hard money” loans (loans with a high interest rate and high costs, which often start out as investments) may be subject to Section 32 and state predatory lending laws.

Some of the restrictions imposed by Section 32 include:

• No balloon payments for loans with less than five-year terms. There is an exception for bridge loans of less than one year used by consumers to buy or build a home.
• No monthly payments that do not fully pay off the loan and that cause an increase in total principal debt (negative amortization).
• No default interest rates higher than pre-default rates.
• No repayment schedules that consolidate more than two periodic payments to be paid in advance from the proceeds of the loan.
• No penalties for prepaying the mortgage in advance of the term. There are some exceptions.
• No due-on-demand clauses. There are also a few exceptions to this, such as when the borrower fails to meet the repayment terms.
• No refinancing a HOEPA loan into another HOEPA loan within the first 12 months of origination, unless the new loan is in the borrower's best interest (this is called “flipping.”)
• No wrongfully documenting a closed-end, high-cost loan as an open-end loan.
• No making loans based on the collateral value of borrowers’ property without regard to their ability to repay the loan. The law actually prohibits the lender from engaging in a “pattern or practice” of doing this, so proving an individual case may not help.

State Predatory Lending Laws

State predatory lending laws generally follow the HOEPA blueprint in that they typically define high-cost loans in terms of the federal thresholds and impose a similar collection of prohibitions and requirements.

State laws, however, can still vary from the federal law in one or more important ways:

First, they may include additional kinds of loans not covered by HOEPA, such as purchases, while excluding others that are covered by the federal law. For example, some states exclude mortgages that are federally insured.

Second, many states have adopted the HOEPA threshold as a starting point, but include or exclude some charges. For instance, Georgia’s law excludes attorneys’ fees, but only if the borrower has been given the opportunity to select the lawyer. Some states also have more stringent rules about the borrower’s ability to repay the loan.

Third, remedies may vary. For example, HOEPA does not offer a direct defense to foreclosure, while certain state laws do give the borrower that option.

Conclusion

Predatory lending laws may provide borrowers with some leverage against a foreclosure depending on what kinds of loans they have and where they live. While these laws seldom provide a way to completely stop a foreclosure, some can reduce the amount of money owed, or give the borrower ammunition with which to renegotiate the loan terms.