Explanation of HOEPA Loan

Attribute to a staffer for Congressman Miller

The term “predatory lending” encompasses a variety of practices. Oftentimes homeowners in certain communities, particularly the elderly and minorities, are targeted with offers of high-cost, home-secured credit. The loans carry high up-front fees and may be based on the homeowners’ equity in their homes, not their ability to make the scheduled payments. When homeowners have a problem repaying the debt, they are often encouraged to refinance the loan. Frequently this leads to another high-fee loan that provides little or no economic benefit to the borrower.

The Home Ownership and Equity Protection Act (HOEPA), as implemented by Federal Reserve Regulation Z, Section 32, imposes additional disclosure requirements on these types of loans and prohibits certain acts and practices in connection with mortgage lending. HOEPA prohibits extending credit without regard to a consumer’s repayment ability. HOEPA identifies a high-cost mortgage loan through rate and fee triggers, and it provides consumers entering into these transactions with special protections.

HOEPA applies to closed-end home-equity loans (excluding home-purchase loans) bearing rates or fees above a specified percentage or amount. A loan is covered by HOEPA if (1) the Annual Percentage Rate (APR) exceeds the rate for Treasury securities with a comparable maturity by more than ten percentage points, or (2) the points and fees paid by the consumer exceed the greater of eight percent of the loan amount or $480 (for 2002, adjusted annually based on the Consumer Price Index).

HOEPA restricts certain loan terms for high-cost loans because they are associated with abusive lending practices. These terms include short-term balloon notes, prepayment penalties, non-amortizing payment schedules, and higher interest rates upon default.