[author: Mercedes Kelley Tunstall]

The Consumer Financial Protection Bureau is moving to broaden the scope of mortgages that would be viewed as “high cost” and therefore subject to special disclosure requirements.

In a notice of proposed rulemaking issued on July 9, 2012, the CFPB proposed amendments to Regulation X and Regulation Z that carry out mandates of The Dodd-Frank Wall Street Reform and Consumer Protection Act to modify the Real Estate Settlement Procedures Act (RESPA) and the Home Ownership and Equity Protection Act (HOEPA) portions of the of the Truth In Lending Act (TILA).

The Dodd-Frank Act, in Sections 1431 through 1433, significantly revised the triggers for determining which mortgages should be classified as HOEPA loans. In the proposed rule, the CFPB proposes additional revisions with the practical result that many more mortgages would be subject to the significant requirements and restrictions of HOEPA.

The mortgage industry already avoids making mortgages subject to HOEPA because the requirements and restrictions, and resulting penalties for failure to comply, are onerous. So, effectively, the CFPB’s proposal will ensure that even fewer mortgages are available to customers with less-than-perfect credit.

Generally speaking, the HOEPA provisions—which have been amended several times since being first incorporated into TILA by Congress in 1994—provide that loans that exceed certain APR triggers, or where loan points and fees exceed a percentage of the loan amount trigger, are deemed “high-cost loans.” For such loans there are special pre-closing disclosures and prohibitions on including loan terms such as prepayment penalties. If such loans are made incorrectly under HOEPA, the borrower has a right to rescind the loan and may seek higher damages than permitted for most other TILA violations.

The proposed rule would implement five changes regarding HOEPA loans:  

• Increase the scope of mortgages eligible to be considered high-cost mortgages.
• Apply an expanded definition of “finance charge” in calculating whether a mortgage qualifies as a high-cost mortgage.
• Revise the triggers for determining if a mortgage qualifies as a high-cost mortgage.
• Impose additional restrictions on terms that can be included in the mortgage.
• Impose expanded counseling requirements.

Scope of HOEPA Coverage 

In 2010, the year for which numbers are most recently available, just 3,400 mortgages made (which represents 0.06 percent of all mortgages) were considered HOEPA loans, which was a significant drop from the 0.4 percent of mortgages considered HOEPA loans as recently as 2004. The significant decline occurred notwithstanding that the Federal Reserve Board expanded the scope of loans subject to HOEPA in 2008.

Currently, refinance loans and closed-end home equity loans that satisfy one or more of the triggers are high-cost loans that are subject to HOEPA, and purchase money mortgage loans, reverse mortgage loans and home equity lines of credit (HELOCs) are excluded from the definition of high-cost loans.Under the proposed rule, reverse mortgages would still be excluded, but purchase money mortgages and HELOCs would be subject to HOEPA requirements if one or more of the triggers are satisfied.

Revised Loan Triggers

The proposed rule would implement the following triggers (provided for by the Dodd-Frank Act) that result in a high-cost mortgage being subject to HOEPA requirements:

• The APR exceeds one of two alternative proposed triggers. Alternative 1 is that the APR exceeds the average prime offer rate of a comparable mortgage by 6.5 percentage points for first-lien mortgages or 8.5 percentage points for subordinate lien mortgages. Alternative 2 is that the APR exceeds the transaction coverage rate by 6.5 percentage points for first-lien mortgages or 8.5 percentage points for subordinate-lien mortgages.
• The points and fees exceed 5 percent of the total loan amount (in the case of a loan for less than $20,000, then the lesser of 8 percent of the total transaction amount or $1,000, adjusted for inflation).
• The loan provides for prepayment penalties that can be charged more than 36 months after loan origination or that exceed 2 percent of the amount prepaid. (If the prepayment penalty meets the trigger, it is deemed a high-cost mortgage and any prepayment penalty would then be prohibited)

The proposed rule provides extensive commentary on how these triggers might be applied.

As noted above, the CFPB proposes two alternatives to determine whether the APR trigger is met. The first alternative is that the “average prime offer rate” for a comparable mortgage would be the rate against which to measure the APR trigger, which is the index rate currently used for purposes of determining if a loan is a higher-priced mortgage loan under Regulation Z. The second alternative would apply to only closed-end loans. Pursuant to the alternative, instead of looking at the proposed loan’s APR, the lender could use the proposed loan’s “transaction coverage rate” (TCR), which means that only prepaid finance charges retained by the lender, mortgage broker, or their affiliates would be included in the calculation (instead of all finance charges).

The TCR alternative is linked to a separate CFPB proposal to the definition of “finance charge,” which is addressed in a separate alert issued today. While the CFPB acknowledges that expanding the definition of “finance charge” would mean that more loans would be high-cost loans, the TCR concept is intended to somewhat “offset” the effects of the expansion. The CFPB advises that the second alternative would not be adopted if the CFPB does not adopt the expanded finance charge proposal.

Loan Term and Related Restrictions 

The proposed rule also contains a number of restrictions on loan terms and lender practices with respect to loans that are high-cost mortgages: 

• Balloon payments are prohibited.
• Prepayment penalties are prohibited.
• Points and fees cannot be financed into the mortgage.
• Late fees are limited to 4 percent of the amount past due.
• Payoff statement fees are limited.
• Loan modification or loan deferral fees are prohibited.

Ability to Repay and Default Recommendations

The current ability to repay analysis that lenders are already required to conduct for high-cost, closed-end mortgage loans would be extended to HELOCs that are high-cost loans. Lenders and brokers also would be specifically prohibited from recommending that borrowers default on any of their obligations to be refinanced with a high-cost loan.

Counseling Requirements

The Dodd-Frank Act also requires lenders to confirm that borrowers have received counseling prior to originating loans subject to HOEPA. The proposed rule would amend Regulation X to require that lenders provide a list of homeownership counselors to borrowers within three days of completing an application for any mortgage (not just a high-cost mortgage). (As addressed in the alert below regarding the CFPB’s integrated disclosure proposal, the CFPB proposes to revise the definition of “application”.) The intent is to require that upfront disclosures, including the list of counselors, be provided early in the loan process. The CFPB advises that it intends to create a website for lenders and borrowers to obtain up-to-date lists of counselors by area. Through a proposal to amend Regulation Z, lenders would also be required to confirm that first-time borrowers have received homeownership counseling.

Effective Date

Finally, the CFPB is seeking comment on the effective date for the final rule. Because of the numerous mortgage-related rulemakings currently in process, the CFPB has requested that the industry take into consideration the need to implement all of the other rules and propose a reasonable time period, presumably longer than 12 months from issuance of the final rule, for the final rule to become effective.