The New HOEPA Rule

By Adelina Olsen, DocuTech Legal & Compliance Specialist

On July 14th, 2008, the Board of Governors of the Federal Reserve adopted its final "HOEPA Rule", amending its Truth in Lending Rules, Regulation Z.

In general the Board prohibited acts or practices in connection with mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of HOEPA, and refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.

The new rule transforms TILA from mainly being a "disclosure rule" to one with significant restrictions. It prohibits specific acts and practices in mortgage lending under the Truth in Lending Act and the Home Ownership and Equity Protection Act. The main changes are listed below:

HOEPA-Covered Loans

The Board defined the highest priced mortgages (HOEPA-covered loans) as loans which the APR exceeds the yield on a Treasury security having a comparable maturity by 8 percentage points, or the total points and fees must exceed 8 percent of the total amount. These loans are subject to special disclosures and other requirements.

"Higher Priced Mortgage Loans"

A new category of "higher-priced mortgage loans" ("HPMLs") was created and sets forth requirements relating to HPMLs. It is intended to cover nonprime loans that are lower-priced than HOEPA-covered loans but higher priced than prime loans. For first lien loans, that means loans that are 1.5 percentage points above the average prime offer rate issued by Freddie Mac, and for second lien loans are 3.5 percentage points over the same index. It includes only closed-end loans secured by the borrower’s principal dwelling. It does NOT include HELOCs, second homes, investment properties, and short term construction loans.

Lenders must be very careful to make sure FHA, jumbo, and PMI loans will not end up in the HPML category.

All Closed-End Mortgage Transactions

The new Rule prohibits certain practices for all closed-end transactions secured by the consumer’s principal dwelling, no matter the price of the mortgage, except for HELOCs. It prohibits creditors, mortgage brokers and their affiliates from coercing, pressuring or encouraging appraisers to misstate or misrepresent a dwelling’s value and also prohibits certain practices involving the crediting of payments, charging late fees, providing payoff statements to consumers, advertising and early disclosures.

Ability to Repay

Creditors that make HPMLs or HOEPA-covered loans are prohibited from extending credit without determining the borrower’s ability to repay, relying on income and/or assets and failing to verify them using reasonably reliable third party documentation. It authorizes the creditor to rely on W-2 forms, tax returns, payroll receipts, financial records or any other document providing reasonably reliable evidence, except statement only from the consumer.

The Rule also establishes a presumption of compliance with this requirement if the creditor verifies and documents repayment ability of borrower, determines repayment ability using the fully indexed rate and fully amortizing payment, and assesses the consumer’s repayment ability using either ratio of the consumer’s total debt obligation to income (DTI) or income the consumer will have after paying debt obligations.

On variable rate loans, while presumption of compliance generally requires use of fully amortizing payment, requirement does not pertain under interest-only loans where initial payment is fixed for at least seven years and for balloon loans with a term of at least seven years.

Prepayment Penalties

Prepayment penalties are prohibited for HPMLs or HOEPA-Covered loans where payments can change during the four year period following loan consummation. For other HPMLs, where payments do not change for four years, prepayment penalties exceeding two years from loan consummation or applicable to refinancing by creditor or its affiliates are prohibited.

Escrows

The rule requires creditors to establish an escrow account for taxes and insurance for at least one year on first liens, with exceptions for loans secured by cooperative apartments and certain condominium loans.

Appraisals

The rule is very broad and prohibits not only coercion but also any act that might influence the appraisal or "otherwise encourage" misstatement of value.

The rule provides examples of acts that are violations (e.g. "telling an appraiser a minimum reported value of a consumer’s principal dwelling that is needed to approve the loan"); and examples of acts that are NOT violations ("asking an appraiser to consider additional information about a consumer’s principal dwelling or about comparable properties").

Creditors must not extend credit if he knows at consummation coercion occurred unless it documents diligence to ensure appraised value is not misstated or extends credit based on a separate appraisal untainted by coercion.

Servicers

Servicers are prohibited from failing to credit a consumer’s periodic payment as of the date received, imposing a late fee or delinquency charge where the only basis is the consumer’s failure to include in a current payment delinquency charge imposed on earlier payments, and failing to provide accurate payoff statement within reasonable time after request.

Advertising Requirements

Requires that whenever payments or rates are included in advertisements for closed-end or open-end loans, all rates or payments that will apply over the term of loan must be disclosed with equal prominence and in close proximity to advertised payment or rate.

For closed end mortgages, the rule prohibits, among other practices, creditors from advertising fixed-rate or payments when the rate or payments are fixed only for a limited period of time rather than for the whole loan term, comparing an actual or hypothetical consumer’s current rate or payment to advertised loan unless the advertisement states rate or payments over the full term of the advertised loan, advertising loan products as "government" or "government sponsored" or otherwise government endorsed loan programs when they are not, advertising that creates false impression that mortgage broker or lender has fiduciary relationship with consumer, and foreign language advertisements in which certain information such as teaser rate is provided in foreign language and other disclosures only in English.

Effective Dates for Compliance

General effective date - October 1, 2009
Servicing rules effective for both new and existing loans as of that date
April 1, 2010 for escrow requirements on site-built homes
October 1, 2010 for escrow requirements on manufactured housing loans

Although this article intends to list the main changes on the Truth in Lending Act, the rule and accompanying supplementary materials are over 400 pages long and there are many nuances yet to be discovered.