|Volume 2, Issue 2, 2002||Federal Reserve Bank of Dallas|
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Changes to Regulation Z Expand Loans Subject to HOEPA
The Home Ownership Equity Protection Act (HOEPA) was enacted in response to anecdotal evidence of abusive practices in the home equity lending market.
HOEPA applies to closed-end home equity loans, excluding home purchase loans and reverse mortgage loans, that bear rates or fees above a specified percentage or amount. Proceeds of closed-end home equity loans can be used for home improvements, debt consolidations or other purposes, at the borrower's discretion.
The regulation that implements HOEPA, Regulation Z, has undergone several changes, including how creditors determine if a loan is covered under the act. Compliance with the expanded HOEPA rules is mandatory as of Oct. 1, 2002.
The final rule contains the amendments to Regulation Z. A summary of the amended regulation follows, with the changes highlighted as .
Defining a High-Cost Home Equity Loan Under HOEPA
To determine whether a loan is covered by HOEPA, the regulation establishes two triggers. The triggers apply to the annual percentage rate (APR)—the cost of credit expressed as a yearly percentage rate—and the points and fees charged on a loan.
Points and Fees Trigger
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. Points and fees include all finance charges except interest. This also includes non-finance charges, such as closing costs paid to the lender or an affiliated third party.
Regulation Z changes require that premiums paid at closing for optional credit insurance—such as credit life, accident, health or loss-of-income insurance and other debt-protection products—be included in the points and fees trigger. One likely effect of this adjustment is that significantly more loans that include optional credit insurance will fall above the trigger established under Regulation Z and be deemed high-cost mortgage loans.
Once a loan has been deemed a high-cost mortgage, the loan becomes subject to certain disclosures, restrictions and limitations.
*Note: The $480 represents the dollar amount for 2002 (66 FR 57849, Nov. 19, 2001 ). This figure shall be adjusted every Jan. 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1.
Disclosures for Loans Covered Under HOEPA
Changes made to Regulation Z affect the disclosures provided to consumers involved in a high-cost loan transaction.
The sample document below illustrates the disclosures required for HOEPA-covered loans. New language has been added to this disclosure form. The disclosure statements in brackets are provided to the consumer only when applicable. The disclosures must be in a conspicuous type size and must be provided to the consumer at least three days before becoming obligated on the mortgage transaction.
The disclosures required by HOEPA are in addition to the disclosures generally required by the Truth in Lending Act at or before closing.
Limitations for Loans Covered by HOEPA
Loans covered by HOEPA are subject to a number of restrictions. Changes in the regulation add a restriction on the use of due-on-demand clauses or call provisions by creditors that can force the consumer to refinance when a creditor exercises its right to call the loan or demand payment of a loan's entire outstanding balance. A loan transaction subject to HOEPA may not include the following:
Prohibited Acts and Practices for Loans Covered by HOEPA
The changes to the regulation add a section containing new and existing prohibitions. A creditor extending a mortgage subject to HOEPA may not:
Finally, to prevent creditors from evading HOEPA requirements, which cover only closed-end loans, creditors are prohibited from wrongfully structuring a home-secured loan as an open-end credit.
Steps for Implementing Changes to Regulation Z (HOEPA)
e-Perspectives, Volume 2, Issue 2, 2002