The Home Ownership and Equity Protection Act (HOEPA) is a federal law that aims to prevent abusive practices in the mortgage industry, ultimately promoting greater transparency and fairness in the market. Read on to learn your rights under HOEPA.

What is HOEPA?

The Home Ownership and Equity Protection Act (HOEPA) is a 1994 amendment to the Truth in Lending Act (TILA) that protects consumers from predatory mortgage lending. The law requires mortgage lenders to provide borrowers of “high-cost mortgages” (see below) with disclosures about how much the loan will cost over its lifetime and the consequences of default. In addition, the law requires that borrowers undergo pre-loan counseling and restricts fees and penalties.

Historically, borrowers with poor credit are offered significantly more expensive loans. HOEPA seeks to ensure that borrowers who take out high-cost loans have a clear understanding of the terms.

Which mortgage types does HOEPA cover?

HOEPA generally covers the following loan types (primary residences):

Key terms

Home equity loans
(aka second mortgages) are closed-end credit, a loan funded in a lump sum and repaid in fixed monthly payments
HELOCs
are a form of open-end credit — loans with a revolving balance that function similar to a credit card

It doesn’t typically apply to:

What classifies as a high-cost mortgage?

A high-cost mortgage, as you might suspect, is an expensive one, but HOEPA describes it rather specifically. Applying to any loan or credit product “that is secured by the consumer’s principal dwelling,” a high-cost mortgage is one in which the annual percentage rate exceeds the average prime offer rate for a comparable transaction by more than 6.5 percentage points for a first-lien loan (like a primary mortgage) or 8.5 percentage points for a subordinate lien (like a home equity loan). The amount of points and fees associated with the mortgage can also cause it to be considered a high-cost mortgage.

The presence or absence of certain other features can also determine a mortgage’s status. The law does not allow high-cost mortgages to charge prepayment penalties or balloon payments, for example.

When a mortgage is classified as high-cost, there are specific requirements that must be met by the lender including that the consumer be fully notified of the consequences of defaulting. Lenders must also clearly disclose all loan terms such as the APR, monthly payments and full amount being borrowed.

HOEPA rules and regulations

There are several provisions within HOEPA, including:

  • Assessing a borrower’s ability to repay: Before issuing a high-cost mortgage, the mortgage lender must thoroughly review the borrower’s finances, including credit history, income, assets and debt.
  • Restrictions on terms: The law restricts balloon payments and due-on-sale clauses in most circumstances, and lenders can’t charge a prepayment penalty. There are also limitations on late fees and some other restrictions.
  • Disclosures: At least three days prior to closing of the high-cost mortgage, the lender must provide a written disclosure to the borrower that explains loan details including annual percentage rate (APR) and monthly payment, as well as the consequences of default.
  • Counseling: Prior to closing, the borrower must receive approved homeownership counseling that covers the disclosures as well as budgeting and affordability.

Other borrower protections that apply to high-cost mortgages

Regulation Z, a component of TILA (although sometimes the two are referred to interchangeably), mandates that mortgage lenders provide disclosures before issuing loans. It requires that borrowers receive one breakdown of costs and expenses when applying for a loan and a second, finalized listing at least three days before closing. This practice allows the borrower to compare the final terms of the closing disclosure to the initial loan estimate.

Regulation Z also prohibits lenders from receiving compensation for committing the borrower to a specific type of loan, or from steering borrowers into a mortgage that results in more compensation for the loan officer, unless doing so is in the borrower’s best interest.

Additional reporting by Mia Taylor