IMPLEMENTING THE NEW HOEPA RULES TO REGULATION Z
frequently asked Questions
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He who asks a question is fool for five
minutes; he who does not ask a question remains a fool forever.
-Chinese
Proverb
Compliance with all the
provisions of The Home Ownership Equity Protection Act (“HOEPA”) (“ACT”) has
been required since October 1, 1995; however, HOEPA still creates an enormous quantity of
confusion. Often, mortgage brokers ask
me questions regarding HOEPA. I have
provided for you some “Frequently Asked Questions and Answers” regarding the HOEPA
rules that are effective beginning October 1, 2009 and other dates. I HOEPA this assists you. These questions and
answers are not all inclusive. They follow
the statute starting with Subpart E, Section 226.32 in sequential order, focusing
primarily on the rules.
What is the purpose of the Rules?
Federal Reserve Chairman Ben S. Bernanke states, "The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership. Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers."
According to former Federal Reserve Governor Randall
S. Kroszner, “These changes have made for better rules that will go far in
protecting consumers from unfair practices and restoring confidence in our
mortgage system.”
In General, what is HOEPA about?
HOEPA is about four
items. First, the ACT provides a
definition of a HOEPA loan and who must comply.
A mortgage is a HOEPA mortgage if one of two tests is failed. Second, the ACT mandates additional
disclosures for a HOEPA loan. Third, the
ACT prohibits certain mortgage terms and conditions and prohibits certain
patterns and practices of making mortgages.
Fourth, the ACT provides penalties for noncompliance.
What does HOEPA mean?
HOEPA means the Home
Ownership Equity Protection Act, Subtitle “B” of the Reigle Community
Development & Regulatory Improvement Act of 1994. The ACT is a major change in the Federal
Truth in Lending Act and Regulation “Z.”
Mortgages originated under
this ACT are called HOEPA mortgages, Section 32 mortgages, Section 129
mortgages, High Cost mortgages or High Interest Rate mortgages.
So what are the big changes in the law?
The amendment creates three
loans subsets. Different rules apply
depending on the loan type. The three
loan types are:
Prime Loans
Higher-priced loans
High Cost loans (HOEPA loans)
The law added new disclosures,
restrictions and limitations for certain loans.
Are all residential loans HOEPA mortgages?
Only a loan on a principal
residence can be a HOEPA loan. A mortgage
is a HOEPA loan if it fails a total
points and fees test or an interest
rate test.
Points and Fees Test A HOEPA mortgage is a mortgage that the total points
and fees exceed the greater of 8% of the total loan amount or $583.00 for 2009 (the
amount has adjusted annually). The total
loan amount excludes the total points and fees.
For example, if you have a $50,000 loan and the total points and fees
are $3,800 then the calculation is $3,800/ ($50,000-$3,800). This is equal to 8.23%. Therefore, you would have a HOEPA loan. Mathematically, if the total points and fees
are less than 7.4074% of the total mortgage, then the total points and fees
will be less than 8.00% of the total loan amount. You probably should allow for a cushion in the
total loan amount by having the total points and fees less than maximum, i.e.
maybe 7.30% and/or having a dollar amount cushion of say maybe $25.00 or so.
Interest Rate Test A HOEPA mortgage is a loan that the annual percentage
rate (APR) at consummation is greater than the comparable US Treasury security
plus 8% for first mortgages. For second mortgages use 10% instead of 8%. The comparable US Treasury security is
determined on the 15th day of the month preceding the month in which the
borrower’s application is received by the lender. As a precaution, you should be slightly under
the maximum APR.
What’s included in points and fees?
A lot more than just points
and fees. The following are points and
fees:
1. All items required to be disclosed under Section 226(a) and Section
226.4(b), except interest or the time-price differential. Section 226.4(a) and 226.4(b) are finance
charges.
2. All
compensation paid to mortgage brokers
3. All items listed in Section 226.4(c)(7) (other than amounts held
for future payment of taxes) unless the charge is reasonable, the creditor
receives no direct or indirect compensation in connection with the charge, and
the charge is not paid to an affiliate of the creditor
4. Premiums or other charges for credit life, accident, health, or
loss-of-income insurance, or debt-cancellation coverage (whether or not the
debt-cancellation coverage is insurance under applicable law) that provides for
cancellation of all or part of the consumer's liability in the event of the
loss of life, health, or income or in the case of accident, written in
connection with the credit transaction.
What the heck is Section 226.4 (c) (7)?
Generally, the Section 226 (c)
(7) charges are reasonable and are paid to independent third parties without
kickbacks to lenders, so this will not be a problem; however, the Section 226
(c)(7) charges are:
1. Fees for title, survey and similar purposes
2. Fees for preparing loan-related documents
3. Notary and credit report fees
4. Appraisal fees and inspection fees if the service is performed
prior to closing including pest infestation and flood hazard determinations
fees
What are the most points and fees that can be charged?
The ACT does not limit the
points and fees that can be charged.
State mortgage brokerage laws determine the limitation. For example in
How is the APR determined for a fixed rate HOEPA loan?
The APR is determined exactly
the same way it usually is.
How is the APR determined for a variable rate HOEPA
loan?
Lenders must use the rules
provided in the commentary to Section 226.17(c) (1) in calculating the APR on a
variable-rate loan. Briefly, the APR
calculation should assume the rate in effect at the time of disclosure remains
unchanged. The commentary also addresses
the APR for discount, premium and stepped-rate transactions (which must reflect
composite annual percentage rates).
How do I know what the HOEPA interest rate is?
The interest rate test is based on whether the subject loan’s APR exceeds the yield on Treasury Securities by more than 8%. To determine the correct yield you must use a comparable period of maturity to the actual subject loans maturity date. The comparable Treasury Securities date used is the 15th day of the month immediately preceding the month in which the borrower’s application was received by the lender.
The Treasury security’s
interest rates are available in Federal Reserve Statistical Release H. 15
at http://www.federalreserve.gov/Releases/h15/.
Look in Statistical
Release H. 15 for the interest rate that matches the term of the subject
mortgage. Add 8% to this interest rate.
When is the borrower’s application considered received
by the lender?
An application is deemed
received when it reaches the lender in any of the way applications are normally
transmitted. An application from a
mortgage broker is considered received when the lender receives it and not when
the mortgage broker receives it.
For example, a mortgage
broker receives an application on September 24 and emails it to the lender on
October 4. The application is deemed received
by the lender on October 4.
If the lender makes a
counteroffer, the mortgage application is considered received when the lender
receives the application and not when the lender makes the counteroffer.
What if the 15th day of the previous month is not a
business day?
If the 15th day of the
previous month is not a business day, the lender must use the yield of the
business day immediately preceding the 15th.
What if my mortgage maturity is not exactly the same
as the Treasury securities?
Treasury securities have the
following maturities, 3-months, 6-months, and 1, 2, 3, 5, 7, 10, 20 and 30-year
maturities.
When the subject mortgage
term does not match a Treasury security term then pick the nearest year’s
maturity. If the subject mortgage year's
maturity is exactly in the middle, use the US Treasury security with the lowest
yield.
For example, Treasury
securities have 7 year (2.57%) and 10 year (2.81%) maturities. An eight-year mortgage would therefore, would
use the 7 year Treasury security interest rate and a 9-year mortgage would use
the Treasury security with a 10-year maturity.
An 8.5-year mortgage would
use the Treasury security with a 7-year maturity since the 7-year maturity
yield (2.57%) is lower than the 10-year security (2.81%). The shorter-term maturity would generally
have a lower interest rate; however, be careful. The yield spread can be
inverted and the longer maturity can have a lower yield. The 30-year maturity treasury security often
has a lower yield than the 20-year maturity treasury security.
What is the highest interest rate that a lender can
charge?
The ACT does not limit the
interest rate that a lender may charge.
The lender is limited to the interest rates allowed by state law.
Can my investor avoid HOEPA if he purchases a HOEPA
loan after closing?
No, anyone who purchases or
is assigned a HOEPA mortgage is subject to all the claims and defenses that the
borrower could assert against the original lender.
What are the five additional disclosures that are
required?
Besides all the other
disclosures required in a regular mortgage transaction by the state and federal
government, this ACT requires the following disclosures to the borrower:
Specific Disclosures The
Specific Disclosure states, "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 no meet your obligations under the loan.”
Annual Percentage Rate Disclosures You must disclose the APR.
Regular
Payment; Balloon Payment Disclosure The disclosure includes the amount of the
regular monthly (or other periodic) payment and the amount of any balloon
payment. The regular payment disclosed under this paragraph shall be treated as
accurate if it is based on an amount borrowed that is deemed accurate and is
disclosed under Amount Borrowed Disclosure.
Variable-rate
Disclosure For variable-rate transactions, the disclosure statement must
include the interest rate and monthly payment may increase, and the amount of
the single maximum monthly payment, based on the maximum interest rate that may
be imposed during the mortgage term.
Amount
Borrowed Disclosure For a refinancing, the disclosure must
state the total amount the consumer will borrow, as reflected by the face
amount of the note; and where the amount borrowed includes premiums or other
charges for optional credit insurance or debt-cancellation coverage, that fact
shall be stated, grouped together with the disclosure of the amount borrowed.
The disclosure of the amount borrowed shall be treated as accurate if it is not
more than $100 above or below the amount required to be disclosed.
What are the limitations that cannot be included in a
HOEPA loan?
The limitations include:
Can a HOEPA loan have a balloon?
Yes. A balloon is acceptable if the term of the
mortgage is 5 years or more. If the
mortgage has a term of less than 5 years then a balloon is not acceptable. A balloon is when the regular payments do not
fully pay off the principal balance and a lump sum payment of more than twice
the amount of the regular payments is required
What if my HOEPA loan is less than 5 years?
A HOEPA loan with a term of
less than 5 years must be fully amortized through “regular periodic
payments”. A payment is a “regular
periodic payment” if it is not more than twice the amount of the other
payments.
What about a “bridge” loan?
If the loan matures in less
than one year and the loan is a “bridge” loan in connection with the
acquisition or construction of a consumer’s principal dwelling, then a balloon
is acceptable.
Can a HOEPA loan have negative amortization?
Simply put, no.
Can I collect a six-month interest reserve in advance?
No, a lender may not collect
in advance more than two periodic payments from the borrower’s proceeds.
Can a HOEPA loan have a default interest rate?
No, the default interest rate
cannot be higher than the interest rate before a default.
How are rebates handled?
A refund shall
not be calculated by a method less favorable than the actuarial method (as
defined by section 933(d) of the Housing and Community Development Act of 1992,
15 U.S.C.
1615(d)), for rebates of interest arising
from a loan acceleration due to default.
What are the prohibited acts and practices under the
ACT?
The following only apply in
certain cases. The act requires the following if applicable.
Home Improvement Contracts Any check to a home improvement contractor must be
payable to the consumer or jointly to the consumer and the contractor. Alternatively,
this can be through an escrow agent in accordance with terms established in a
written agreement signed by the consumer, the creditor and the contractor.
Notice to Assignee If the mortgage is sold or assigned, a notice must be furnished to the
buyer.
Refinancings
within one-year period
During the first year of the HOEPA loan, the
creditor shall not refinance any HOEPA loan to the same borrower into another HOEPA
loan, unless the refinancing is in the borrower's interest. A creditor (or
assignee) is prohibited from engaging in acts or practices to evade this
provision, including a pattern or practice of arranging for the refinancing of
its own loans by affiliated or unaffiliated creditors, or modifying a loan
agreement (whether or not the existing loan is satisfied and replaced by the
new loan) and charging a fee.
Repayment
ability A lender can
not base a HOEPA loan on the
value of the consumer's collateral without regard to the consumer's repayment
ability as of consummation, including the consumer's current and reasonably
expected income, employment, assets other than the collateral, current obligations,
and mortgage-related obligations. The repayment ability must be verified.
Under the Act, what does a creditor need
to do to have a presumption of compliance regarding the repayment ability?
A creditor is
presumed to have complied with the repayment ability with respect to a
transaction if the creditor:
Notwithstanding
the previous paragraph, no presumption of compliance is available for a
transaction for which:
This provision
does not apply to temporary or "bridge" loans with terms of twelve
months or less, such as a loan to purchase a new dwelling where the consumer
plans to sell a current dwelling within twelve months.
What are the mortgage-related obligations in repayment
ability?
Mortgage-related obligations are expected property taxes, premiums for mortgage-related
insurance required by the creditor.
Can a lender charge a prepayment penalty?
Yes, but a lender must comply
with five requirements.
First, the prepayment penalty
is not prohibited under any other law.
Second, the prepayment
penalty can only apply for the first 2 years of the mortgage.
Third, the payment of the
prepayment penalty cannot come from refinancing of the mortgage from the lender
or the lender’s affiliate.
Fourth, at
closing, the consumer's total monthly debt payments (including amounts owed
under the mortgage) do not exceed 50 percent of the consumer's monthly gross
income, as verified in accordance with Section 226.34(a)(4)(ii), verification
of repayment ability.
Fifth, the amount
of the periodic payment of principal and/or interest may not change during the
four-year period following closing.
What is the Section 226.34(a) (4) (ii) regarding verification
of repayment ability?
Under this paragraph,
a creditor must verify the consumer's repayment ability as follows:
1. A creditor must verify amounts of income or assets that it relies
on to determine repayment ability, including expected income or assets, by the
consumer's Internal Revenue Service Form W-2, tax returns, payroll receipts,
financial institution records, or other third-party documents that provide
reasonably reliable evidence of the consumer's income or assets.
2. Notwithstanding the above paragraph, a creditor has not violated the
verification of repayment ability if the amounts of income and assets that the
creditor relied upon in determining repayment ability are not materially
greater than the amounts of the consumer's income or assets that the creditor
could have verified pursuant to the paragraph above at the time the loan was
consummated.
3. A creditor must verify the consumer's current obligations.
What is the due-on-demand clause limitation?
A HOEPA loan can contain a demand feature that permits the creditor to terminate the loan in
advance of the original maturity date and to demand repayment of the entire
outstanding balance. A creditor can
demand repayment in the following three events:
1. There is fraud or material
misrepresentation by the consumer in connection with the loan
2. The borrower defaults on the mortgage
3. There is any action or inaction by the
consumer that adversely affects the creditor's security for the loan, or any
right of the creditor in such security.
What are “higher-priced mortgage loans”?
Section 226.34 creates a subset of consumer residential mortgage loans referred to as “high-priced mortgage loans”. A higher-priced mortgage loan is a mortgage on a consumer's principal dwelling with an annual percentage rate that exceeds the average price offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for loans secured by a first lien on a dwelling, or by 3.5 or more percentage points for loans secured by a subordinate lien on a dwelling. Loans that do not exceed the above interest rates are “prime loans”. Higher-priced loans can include purchase money mortgages.
What is “Average prime offer
rate?”
What does “higher-priced loan” not include?
Notwithstanding
the above answer, the term "higher-priced mortgage loan" does not include
the following transactions:
What are rules for higher-priced mortgage loans?
Higher-priced
mortgage loans are subject to the following restrictions:
What is the rule for repayment ability for
higher-priced loans?
A creditor shall not extend credit based on the value of the consumer's
collateral without regard to the consumer's repayment ability as of
consummation as provided in the “What are
the prohibited acts and practices under the ACT?” question above.
What is the rule for prepayment penalties
for higher-priced loans?
A loan may not include a prepayment penalty unless:
The “Can a lender charge a prepayment penalty?” is satisfied. Under
the terms of the loan, the penalty will not apply after the two-year period
following consummation; the penalty will not apply if the source of the
prepayment funds is a refinancing by the creditor or an affiliate of the
creditor; and the amount of the periodic payment of principal or interest or
both may not change during the fourth-year period following consummation.
What are the new laws for escrow accounts
for higher-priced loans?
Except as provided in paragraph below, a creditor may not extend a loan secured
by a first lien on a principal dwelling unless an escrow account is established
before consummation for payment of property taxes and premiums for
mortgage-related insurance required by the creditor, such as insurance against
loss of or damage to property, or against liability arising out of the
ownership or use of the property, or insurance protecting the creditor against
the consumer's default or other credit loss.
Escrow accounts need not be established for loans secured by shares in a
cooperative and insurance premiums need not be included in escrow accounts for
loans secured by condominium units, where the condominium association has an
obligation to the condominium unit owners to maintain a master policy insuring
condominium units.
A creditor or
servicer may permit a consumer to cancel the escrow account only in response to
a consumer's dated written request to cancel the escrow account that is
received no earlier than 365 days after consummation.
When are the higher-priced loans
effective?
The rule is
effective on October 1, 2009. The repayment ability, prepayment penalty and
the escrow rules are effective October 1, 2010.
For new construction the escrow rules are effective on April 1, 2010.
What loans are exempt from the Act?
The following is a partial
list of exempt loans:
Some of these laws and regulations are new, when are
they effective?
Most of these are effective
now! Some effective dates are marked in
the text. Consult an appropriate
professional to discuss the actual effective date of these laws and rules.
Where can I read more about the actual ACT and learn
more about it?
The source material follows:
·
The Truth In
Lending Act (TILA; 15 U.S.C. 1601 et seq.)
·
The Federal
Reserve Board’s Regulation Z (12 CFR part 226)
·
The Federal
Reserve Board’s Official Staff Commentary [12 CFR part 226 (Supp. I)]
OK, so now I know everything I need to know about HOEPA
mortgages?
No! The Federal Reserve Board’s staff and courts continues
to interpret the law, so much is still unresolved. This is only a summary of parts of the
ACT. It is not a substitute for actually
reading the ACT and discussing it with competent professionals.
The answers are based on the
ACT but should not be relied upon without a review of the statute, regulations
and the Board of Governors’ commentary.
This information is not to be construed as legal advice. For legal advice, please consult a
professional practicing real estate mortgage attorney.
So what did you leave out?
I have not discussed open-end
home equity plans, advertising and abuses.
Again, this is an overview.
Please discuss the new law with your legal counsel for how the law affects
your business. There are also provisions for regarding appraisal coercion.
This article was written to
provide accurate and authoritative information in regard to the subject matter
covered. It is printed with the understanding that the author is not offering
any legal, accounting or professional service and the information stated should
not be applied to any specific factual instance. If you are unsure about a
particular situation, you should consult an attorney.
Gary Opper is the managing member of Levie-Opper, LLC,
a mortgage fraud litigation support firm. He has a CPA and a CFP license. Opper
is past President of the FAMB -
©
HOEPA Mortgage Loan Calculation
Loan Name _________________________
Points & Fees Test
Mortgage Loan Amount (A) $_____________
/
Mortgage Lender
Point(s) $______________
/
Mortgage Broker
Point(s) $______________
/
Mortgage Lender
Fees $______________
/
Mortgage Broker
Fees $______________
/
Flood Cert. $______________
/
Tax Service Fee $______________
/
Notary Fee or
Courtesy Closing $______________
/
Assignment of
Mortgage $______________
/
Courier Fees $______________
/
Other Fees (1) $______________
Total Points & Fees (B) $(_______________)
Total HOEPA Loan Amount (A-B)
(C) $_________________
8% of Total HOEPA Loan Amount
{.08 x the above(C)} (D) $_________________
Interest Rate Test
Date Mortgage Loan
Application Received __________________
15th Day of the Previous
Month (2) __________________
Length of Mortgage in Years ___________ year(s)
Length of Comparable U.S.
Treasury Security (3) ___________ year(s)
Comparable U. S. Treasury
Security Interest rate for
Loan Term for 15th Day of the
Previous Month (E) ________________%
Comparable
Actual APR (G) ________________%
I. Points & Fees Test (B) $____________________
< (D) $ _____________________
(Total Points &
Fees) (8% of HOEPA
loan)
II. Interest Rate Test (G)
____________________% < (F) ____________________%
(Actual
APR) (Comparable
If
(1) OTHER
FEES are all items included in the finance charge, except interest or
time-price differential and each of the charges listed in Section 226.4 (c)(7),
unless the charge is reasonable, the lender receives no compensation and the
charge is to an independent third party.
Section 226.4(c)(7) charges are: title examination fees, documentation preparation fees, notarization fees,
appraisal fees, credit reports, pest infestation inspection fees and flood zone
determination fees.
(2)
If the 15th day of the previous month is not a business day, the lender must
use the yield of the business day immediately preceding the 15th.
(3) Treasury securities have
the following maturities, 3-months, 6-months, and 1, 2, 3, 5, 7, 10, 20, and
30-year maturities. When the subject
mortgage term does not match a Treasury security term then pick the nearest year’s
maturity. If the subject mortgage year's
maturity is exactly in the middle, use the US Treasury security with the lowest
yield.
For example, Treasury
securities have 7 year (2.57%) and 10 year (2.81%) maturities. An eight-year
mortgage would therefore, would use the 7 year Treasury security interest rate
and a 9-year mortgage would use the Treasury security with a 10-year maturity.
An
8.5-year mortgage would use the Treasury security with a 7-year maturity since
the 7-year maturity yield (2.57%) is lower than the 10-year security (2.81%).
The shorter-term maturity would generally have a lower interest rate. However, be careful, the yield spread can be
inverted and the longer maturity can have a lower yield. The 30-year maturity treasury security often
has a lower yield than the 20-year maturity treasury security.
(4) For first mortgages use
8% for subordinate mortgages use 10%.
Form
by
954-384-4557
Fax 954-384-5483
©