How is HOEPA different in 2014?
With everyone focused on the QM and the LO Comp. rules, other regulatory changes this year may have gotten less attention than they otherwise would have. Here are some thoughts on HOEPA post-January 2014.
The thing to know about HOEPA (high-cost rules) is that, under the 2014 changes, more loans are affected than ever before. I believe an article in California's Business Law News (author, Adam Jaskievic) put it best:
The [CFPB's new HOEPA] rule ... was one of those rules that was often overlooked [in 2014]. While the true extent to which the new [HOEPA] amendments are affecting the industry has yet to be fully understood, one thing is certain: far more mortgage loans are triggering HOEPA requirements now than before.
HOEPA now affects more loans for two reasons: (#1) the scope was expanded to include more types of loans, and (#2) the "high cost" thresholds were lowered (including adding a new test) so more loans are likely to be classified as high cost.
#1) Broader Scope for HOEPA
The first reason why the HOEPA rule will affect more loans than in 2014 is that the scope of the rule itself is broader. Now- the HOEPA rule applies to "any consumer credit transaction that is secured by the consumer's principal dwelling."
They got rid of the following exemptions:
Purchase loans
HELOCs
Bridge loans
Home improvement loans
So- no longer is the HOEPA rule just for refinances ... it now applies to most mortgages you'll do.
The only exemptions left standing are:
Reverse mortgage
Initial construction loans
A loan originated by an HFA (e.g., MassHousing). *Contrast this exemption with the exemption from QM. Here, the HFA needs to be the "creditor" ... with QM, the loan is exempt so long as it was originated "pursuant to" the HFA's program.
P.S. Don't forget the rule only applies to "consumer" loans secured by a "principal dwelling." So this doesn't apply to non-owner occupied investment properties or the borrower's vacation home at the beach.
#2) Tougher Test for "High Cost"
The second reason that the 2014 HOEPA rule affects a greater number of loans is that the test for defining "high cost" has been changed. The APR and points/fees tests are tougher, and there is an entirely new pre-payment penalty trigger.
Now, a transaction is "high cost" if ANY of the following tests are triggered:
APR exceeds APOR by more than 6.5 points (some exceptions)
Points and fees exceeds 5% (different limit for loans under $20k) *this generally tracks the QM points + fees test, but has a higher threshold
Loan terms allow lender to charge a pre-payment penalty either (a) more than 36 months after closing or (b) for more than 2% of the amount prepaid. *this mirrors the test that already applies to closed-end loans. The significance of this HOEPA test is that it applies to HELOCs (which would otherwise be exempt from the pre-payment penalty restrictions, which are found in 12 CFR 1026.43).
Restrictions on "High Cost' Loans as of 2014
Why do we care if loans are labeled "high cost?" There are heightened disclosure and operational requirements, as well as greater liability risk. Here are some of the restrictions that the HOEPA rule places on high-cost transactions:
Borrower must receive homeownership counseling before the loan closes
HELOCs become subject to the ATR/QM rule (meaning that lender must now assess the borrower's ability-to- repay on the HELOC, which is not normally required by the ATR/QM rule). Ouch!
Cannot charge prepayment penalties or finance points and fee
There are restrictions on fees, e.g., no more than 4% of the amount due for late fees
Of course, States (for example, Massachusetts) may choose to place even more restrictions on high-cost mortgages.
Note:
I don't know who made it, but here is what looks like a pretty helpful chart explaining the differences before and after the 2014 HOEPA changes.
Other news/thoughts/trivia:
The debate over Richard Cordray's authority to head the CFPB is alive again- after the Supreme Court came out and declared other recess appointments by the President unconstitutional, some are arguing the Court's decision should also apply to Cordray. In short, they're trying to argue that Cordray acted unlawfully during the 18 months he served as Director before being confirmed by the Senate in 2013 ... calling into question all the work they did in that time. Of course, Cordray's appointment lasts until 2018 ... maybe not enough time for any case to make its way through the court system.
Is there any loyalty anymore? On June 26th we found out that our friend is also sending in jokes to Rob Chrisman (I thought we were special!). Check out the first sentence of R. Chrisman's daily e-mail on June 26 here
House bill 5421 would raise the limit for the "small servicer" exception to 20,000 loans serviced ... but it has to survive the Senate!
Finding that their current process of trying to answer questions individually, the CFPB is taking a new approach to the 2015 integrated disclosures rule ... they're offering free webinars on a regular basis. The first has already been given, but sign up and you won't get behind. Is student debt going to cripple the mortgage industry? At least some research suggests not, and that concerns over student debt here are overblown.
So much for our (USA) World Cup aspirations ... at least we'll win the Superbowl next season!
Hopefully, after we've struggled through the implementation of the Dodd-Frank rules of 2014, the upcoming HMDA changes, the 2015 integrated disclosures rule, the Qualified Residential Mortgage rule, etc., etc. - we'll have a period of time to get back to the business of lending!
"Someone's sitting in the shade today because someone planted a tree a long time ago."
- Warren Buffet
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