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Volume 2, Issue 2, 2002   Federal Reserve Bank of Dallas

Applying the Points and Fees Test

Regardless of lien position, a home equity loan is covered by HOEPA if the total points and fees the consumer pays at or before loan closing exceed the greater of $480 or 8 percent of the total loan amount.

Using the values and properties from the loan example, the following points and fees test is performed.

Disclaimer: This example is presented strictly for illustrative purposes. All results disclosed by the example are estimates, and the Federal Reserve Bank of Dallas assumes no liability or responsibility for computational errors. No guarantee, explicit or implied, is made regarding its accuracy or suitability to a specific purpose.

Note: The purpose of this example is to illustrate how recent changes to Regulation Z affect high-cost home equity loans covered by HOEPA. Restrictions may apply, and results may vary depending on the borrower's data. We based our example on several assumptions:
  1. The loan is a simple-interest loan.
  2. The total amount financed was calculated using one possible formula. See how it was calculated.
  3. The amount of all fees is reasonable, and the third-party companies are not affiliated with the creditor.
  4. The term "finance charges" used throughout this example is meant to include those finance charges that could be included in the points and fees test. Not all charges included in the points and fees calculation are considered finance charges.
  5. Appraisal ($200) and optional credit life insurance ($300) were financed by the consumer at closing.
  6. Loan points ($55) and loan service fee ($100) were prepaid by the consumer at closing.
  7. Title insurance ($200), credit report ($50), flood hazard determination ($30) and pest inspection ($45) are reasonable, bona fide closing costs paid to third parties unaffiliated with the creditor.
  8. Document preparation fee ($100) paid to creditor.

 

Step 1: Add the charges that meet the definition of points and fees.

Loan Points $55
Loan Service Fee $100
Document Preparation $100
Appraisal $200
Optional Credit Life Insurance $300
   
Total Points and Fees $755

Step 2: Determine the total loan amount under HOEPA.

Begin with the amount financed:
(see how to calculate) 		  $5345
       
Subtract non-finance closing charges that are included in the points and fees test and are financed and optional credit insurance if financed to find the total loan amount under HOEPA:
     Non-finance charges paid to creditor or affiliate that are financed
(Appraisal -- $200) 		– $200
  Optional credit insurance paid by consumer and financed – $300
Total Loan Amount = $4845

Step 3: Calculate 8% of the total loan amount.

Total loan amount from Step 2 $4845
Multiply by 8% x .08
8% of the Total Loan Amount = $388

Step 4: Do the total points and fees exceed the greater of 8% of the total loan amount or the annually adjusted threshold?

Total Points and Fees $755
8% of the Total Loan Amount $388
Annually Adjusted Threshold     $480
$755 > $480

YES, the total points and fees exceed the greater of 8% of the total loan amount or the annually adjusted threshold.

Since the result is YES, the loan IS subject to the high-cost rules under HOEPA according to the points and fees test (provided that the loan is secured by the customer's principal dwelling and is not a residential mortgage transaction, a reverse mortgage transaction or an open-end credit plan).

If the result had been NO, the loan would NOT be subject to the high-cost rules under HOEPA according to the points and fees test, but could still qualify under the APR test.

See how the changes to Regulation Z affect high-cost home equity loans:

Full text of changes to Regulation Z:

e-Perspectives, Volume 2, Issue 2, 2002

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The views expressed are the authors' and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Community Affairs Office.

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