What is home ownership and equity protection act (HOEPA)?

What Is a High-Cost Mortgage Under HOEPA?

HOEPA creates a category called "high-cost mortgages" — loans that exceed specific rate or fee thresholds and therefore get additional regulatory scrutiny. The key thresholds (as implemented in CFPB Regulation Z, 12 CFR § 1026.32) are:

• APR threshold (first liens): APR exceeds the Average Prime Offer Rate by more than 6.5 percentage points for most first-lien transactions. The APOR is published weekly by the CFPB and reflects current market rates for prime mortgages. A loan priced far above this benchmark is, by definition, expensive enough to trigger consumer protection scrutiny.
• APR threshold (subordinate liens / second mortgages): APR exceeds the APOR by more than 8.5 percentage points.
• Points-and-fees threshold: Total points and fees exceed 5.0% of the total loan amount for loans of $27,592 or more. For smaller loans, the threshold is the lesser of 8.0% or $1,380. This catches loans where the rate looks reasonable but the origination costs are predatory.
• Prepayment penalty threshold: A loan can trigger high-cost coverage if the prepayment penalty can be charged more than 36 months after consummation or account opening, or if total prepayment penalties can exceed 2.0% of the amount prepaid.

HOEPA coverage applies to qualifying consumer credit secured by the borrower's primary dwelling, including purchase-money closed-end mortgages and home equity lines of credit, subject to specified exclusions.

What HOEPA Prohibits on High-Cost Mortgages

Once a loan triggers HOEPA coverage, federal law prohibits the following terms:

• Balloon payments: High-cost mortgages generally can't have a scheduled payment more than twice the average of earlier scheduled payments, subject to specified exceptions. This bans the classic predatory structure where borrowers make low payments for years, then face a massive lump-sum payoff that forces refinancing into another high-cost loan.
• Negative amortization: Monthly payments cannot be structured so that the unpaid interest adds to the principal balance — a practice that causes borrowers to owe more over time even while making payments.
• Prepayment penalties: Lenders can't charge a penalty for paying off all or part of a high-cost mortgage before it is due. This prohibition also applies during the first three years.
• Default rate increases: The interest rate cannot increase upon default — lenders cannot use a borrower's financial difficulty as a trigger to jack up the rate, compounding the hardship.
• Asset-based lending: The creditor must verify the borrower's income and ability to repay from sources other than the home's equity. Lending purely on collateral value without ability-to-repay verification is prohibited — this was central to the predatory lending model of the early 2000s.
• Single-premium credit insurance: Lenders cannot finance the entire premium for credit life, disability, or unemployment insurance in a single upfront payment added to the loan balance, a practice that padded lender revenue while adding to borrower debt.

Mandatory Counseling Requirement

Before a high-cost mortgage can close, the creditor must receive confirmation that the borrower has obtained housing counseling from a HUD-approved counselor. This is not a checkbox disclosure — it is a substantive requirement that the borrower meet with an independent counselor who can explain the loan terms, discuss alternatives, and identify whether the loan's costs are justified.

The counseling requirement is specifically designed to create a speed bump in the predatory lending process. High-cost loans are most commonly originated in urgent or high-pressure situations — a homeowner facing foreclosure, a borrower with limited English proficiency, or a senior extracting equity to pay medical bills. A required third-party consultation gives the borrower a chance to hear from an independent advisor before signing.

Rescission Rights

Borrowers on high-cost mortgages have an enhanced right of rescission. The creditor must deliver the HOEPA disclosure at least 3 business days before closing — not on the closing day. If the lender fails to deliver required material disclosures or the rescission notice, an otherwise applicable right of rescission under TILA generally stays open longer. It ends 3 years after consummation, on transfer of all of the borrower's interest in the property, or on sale of the property, whichever comes first.

HOEPA's History: From 1994 to Dodd-Frank

When HOEPA was enacted in 1994, its coverage was deliberately narrow — the thresholds were set high enough that very few loans qualified. Critics argued this allowed widespread predatory lending in the subprime market that technically fell below HOEPA's triggers. Between 2000 and 2007, subprime loans with teaser rates, prepayment penalties, and balloon payments proliferated — many pricing just below HOEPA thresholds. The Federal Reserve, which had authority to expand HOEPA coverage under TILA, moved slowly.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) transferred HOEPA rulemaking to the newly created CFPB and directed it to expand coverage. The CFPB's 2013 HOEPA rule (effective January 2014) lowered the APR thresholds, tightened the points-and-fees calculation, added the mandatory counseling requirement, and clarified that purchase-money mortgages could also be high-cost. The separate ability-to-repay and Qualified Mortgage (QM) rule applies to covered consumer credit transactions secured by a dwelling, subject to specified exclusions.

HOEPA and Predatory Lending Today

While subprime mortgage origination collapsed after 2008, high-cost lending has not disappeared. It has migrated toward specific product types: non-QM loans for borrowers who cannot document income, hard-money loans originated by non-bank lenders, certain refinance transactions targeting equity-rich but income-poor homeowners (often seniors), and some state-regulated alternative products. HOEPA coverage depends on exceeding specific numerical thresholds — borrowers and counselors should always calculate whether a proposed loan triggers HOEPA before closing.