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HOEPA – Definition

George Simons | October 19, 2022

If you are buying a house, learn more about HOEPA.

Summary: HOEPA is a law that protects people signing up for a mortgage loan. Here is SoloSuit's on HOEPA, mortgage loans, and your rights as a potential home-buyer.

The Home Ownership and Equity Protection Act, popularly known as HOEPA, is a federal law that prevents certain abusive practices in the mortgage industry. This is because many homeowners find themselves in a vicious cycle of debt after purchasing a house.

There are so many reasons borrowers need protection when buying a house. This article discusses everything you need to know about these protections provided by HOEPA.

Be careful with home loans

Home loans are some of the most expensive loans you can acquire because they require many years of financial commitment. But unfortunately, many homeowners lose their homes due to a lack of a better understanding of such loans. In addition, since the mortgage industry is thriving, some lenders focus more on profiting from borrowers who have no clue about how this industry works.

When you're ready to buy a house, chances are you're excited about it. The lender also knows how desperate you are to move in. As a result, some lenders may not explain everything you need to know about the loan. Some will only focus on what you need to pay every month to keep the house. While the agreed amount might seem affordable at that moment, life happens.

Your monthly mortgage payments will become too expensive when you can't financially care for yourself or your family. Although most people don't like to think about the worst-case scenario, it's always advisable to prepare for such possibilities. This is where HOEPA comes in.

What is HOEPA?

The Home Ownership and Equity Protection Act requires mortgage lenders to provide borrowers of high-cost mortgages with complete information about the costs of the loan and the repercussions of default. This disclosure gives borrowers a chance to review the loan and decide whether it suits them.

In addition, this law requires borrowers undergo pre-loan counseling. The counseling provides borrowers with important information about the type of loan they wish to apply for. The whole point of pre-loan counseling and HOEPA, in general, is to protect the borrower from abusive practices by lenders.

For instance, you may be interested in rebuilding your credit when you have a bad credit score. Taking a home loan can help build your credit, but without proper guidance and counseling, it could damage your credit even further. This is because individuals with bad credit usually have a tougher time securing a loan. In addition, because they're considered 'high-risk' individuals by lenders, they usually pay high interests, fees, and penalties on their loans.

Their journey to rebuilding their credit and securing a better financial future becomes even more complex. Some surrender their houses back to the lender, ruining their chances of securing similar loans in the future.

Common HOEPA provisions you need to know before buying a house

While HOEPA has numerous rules and regulations, here are the most common:

  • Lenders must assess the borrower's ability to pay.
  • Lenders must provide disclosures.
  • Lenders' actions are restricted.
  • Borrowers must receive counseling.

Now, let's break each of these rules and regulations down in detail.

Lenders must assess the borrower's ability to pay

Before approving a mortgage, the lender must assess the borrower's ability to pay the loan. This explains why banks will evaluate your credit history, assets, income, debt, and other factors to decide whether you qualify for a mortgage.

Lenders must provide disclosures

When you take a high-cost mortgage, the lender must provide you with a disclosure at least three days before closing. The written disclosure should contain the loan details such as the Annual Percentage Rate, monthly payments, and the repercussions of missing payments. This gives you time to decide whether the loan terms suit you.

Lenders' actions are restricted

HOEPA restricts certain actions by lenders. For example, lenders can't impose balloon payments, prepayment penalties, or due-on-sale clauses in most cases.

HOEPA also dictates how late fees should be charged, among other restrictions. The main purpose of these restrictions is to control the lender's activity.

Some lenders take advantage of the borrower's lack of understanding of how the real estate market works. As a result, they lure them into signing contracts that could potentially ruin their financial future. That's what HOEPA tries to prevent.

Borrowers must receive counseling

As mentioned before, borrowers must receive homeownership counseling. It gives them a better understanding of the disclosure and how to budget for the loan. Remember, this counseling should be provided before closing, not after.

HOEPA also has strict rules lenders must follow when providing counseling to borrowers before purchasing a house. Firstly, lenders must certify that the borrower has received homeownership counseling from an agency approved by the US Department of Housing and Urban Development. Secondly, to ensure transparency when providing counseling, lenders should:

  • Not lure borrowers into choosing a particular counseling agency.
  • Provide a list of at least ten homeownership counseling organizations closest to the borrower's zip code.
  • Provide the list within three days of receiving the application.
  • Not list a counselor affiliated with or employed by the lender.

In addition, the list of homeowner's counseling organizations must contain:

  • The name of the agency.
  • Their phone number.
  • Physical address, city, state, and zip code.
  • Website address.
  • Email address.
  • List of counseling services provided.
  • Languages spoken.
  • A full disclosure statement.

What types of loans does HOEPA cover?

HOEPA covers the following types of loans:

  • Refinances
  • Purchase-money mortgages
  • Open-end credit plans
  • Closed-end home equity loans

However, these housing laws don't cover the following types of loans:

  • Loans originating from and financed by the Housing Finance Agency
  • Mortgages for vacation or second homes
  • Loans originating from the US Department of Agriculture Rural Development Loan Program
  • Construction loans

What is a high-cost mortgage?

As mentioned before, HOEPA protects individuals taking high-cost mortgage loans. The number of points and fees paid within the transaction or the prepayment penalties determine whether a loan is high-cost.

Generally, a loan is considered high-cost if its APR is more than the Average Prime Offer Rate for comparable transactions on that date more than:

  • 8.5% points for junior-lien transactions.
  • 8.5% points for first-lien less than $50,000 and secured by personal property such as boats, and recreational vehicles.
  • 6.5% points for first-line transactions.

The Federal Financial Institutions Examinations Council (FFIEC) has an online tool you can use to determine whether a loan is high-cost.

You can find relief from mortgage debt

If you are struggling to keep up with your mortgage, as well as your other financial obligations, there is hope. You may have been contacted by collections regarding your debt. You may have even been notified of a debt lawsuit against you.

If you have been sued for debt, SoloSuit can help you respond in court and win your case.

Check out this video to learn more:

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