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 the Home Ownership and Equity Protection Act (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” 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 receive significantly more expensive loans. HOEPA seeks to ensure that borrowers who take out high-cost loans have a clear understanding of the terms.

Which mortgages does HOEPA cover?

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

  • Purchases
  • Refinances
  • Home equity lines of credit (HELOCs or open-end credit) and home equity loans (closed-end loans)

It doesn’t typically apply to:

  • Reverse mortgages
  • Construction loans (just the construction financing; it does apply to end or permanent loans)

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 referred to interchangeably), mandates that mortgage lenders provide disclosures before issuing loans. It requires that borrowers receive one disclosure when applying for a loan and a second, finalized disclosure 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.

Bottom line

When you shop for a mortgage, it’s important to know your protections under HOEPA, Regulation Z and TILA. Knowing these rights can help you to recognize predatory and illegal practices and avoid harm to your financial health.