United States

High-Cost Mortgage and Homeownership Counseling Proposal


The Consumer Financial Protection Bureau (CFPB) issued a proposal on high-cost mortgage loans on Aug. 15, 2012. HOEPA or the Home Ownership and Equity Protection Act amended the Truth in Lending Act back in 1994 to address what was considered the abusive use of high interest rates and fees associated with mortgage loans and refinancings. Now, in response to the mortgage crisis, the types of mortgage loans that are subject to HOEPA are being amended and those amendments are being implemented in Regulations Z and X through this proposal. The amendments the Bureau is putting forth in this proposal can be separated into four main areas:

  • Scope – the proposal expands the types of loans subject to HOEPA.
  • Thresholds – the triggers for coverage under HOEPA are being revised and expanded.
  • Protections – additional restrictions are being imposed on HOEPA mortgage loans.
  • Homeownership counseling – the proposal imposes homeownership counseling requirements.


The scope for what can be considered a high-cost mortgage has been expanded with this proposal. Now the rules apply to both purchase money mortgage loans and home equity lines of credit. Previously, the rule applied to closed-end home equity loans and refinances only. Under the proposed rule, most types of mortgage loans secured by a consumer’s dwelling are subject to coverage. Reverse mortgages are still excluded.


Not only has the scope expanded, but the thresholds or triggers for determining high-cost loans have been lowered meaning the number of loans that make it into the high-cost category will increase. The proposal lowers the trigger for the APR test from 8 to 6.5 percent over the average prime offer rate for first-lien mortgages and from 10 to 8.5 percent for second-lien mortgages. The proposed rule provides guidance on how to apply the APR trigger. For instance, the interest rate used to determine coverage for variable-rate loans would be based on the maximum margin permitted any time during the loan added to the index rate in effect at the time of consummation.

The loan points and fees trigger will change quite a bit. Currently, loans in which the total points and fees payable by the consumer at or before loan consummation exceed the greater of $611 or 8 percent of the total loan amount will trigger the loan to be subject to HOEPA. The points and fees trigger in this proposal is 5 percent of the total loan amount for a transaction with a total loan amount of $20,000 or more and for a transaction less than $20,000 the trigger would be the lesser of 8 percent of the total loan amount or $1,000.

This proposal adds a couple prepayment penalty triggers to the mix so now there are these additional triggers to consider. If a prepayment penalty may be assessed after more than three years from loan origination, the loan will be considered a high-cost mortgage. In addition, if a prepayment penalty may exceed more than 2 percent of the amount prepaid, the loan becomes high-cost. The proposal includes examples of how these new triggers are applied.

The recently proposed RESPA/TILA integration proposal, discussed in an article in this newsletter, proposes a broader definition of finance charge. In other words, the definition of finance charge may be expanded to include all up-front costs. If that is the case, the proposed change in the finance charge definition would cause more loans to exceed the high-cost loan APR and points and fees triggers and therefore cause more loans to be classified as high-cost mortgages.


If a loan is determined to be high-cost, then the loan will have certain limitations or restrictions which are considered protections to the consumer. This proposal expands the protections and adds the following restrictions:

  • Balloon payments largely banned
  • Prohibited from charging prepayment penalties and financing points and fees
  • Late fees no greater than 4 percent of the payment that is past due
  • Fees for providing payoff statements restricted
  • Fees for loan modifications banned
  • Ability to repay assessment required for open-end plans (already required for closed-end plans)
  • Required to obtain proof consumer received counseling on advisability of the loan

Balloon payments would be banned with a couple of exceptions, one being a mortgage transaction with a payment schedule that is adjusted to the seasonal or irregular income of the consumer. There are a few more restrictions that aren’t listed above. A high-cost mortgage cannot include a demand feature that permits the creditor to accelerate the indebtedness by terminating the high-cost mortgage. In addition, a creditor cannot refinance a high-cost mortgage into another high-cost mortgage for the same borrower. Lastly, a creditor may not recommend or encourage default on an existing loan prior to and in connection with the consummation of a high-cost mortgage that refinances all or any portion of such existing loan or debt.

Homeownership counseling

As noted above within the list of additional restrictions, the high-cost mortgage proposed rule requires a creditor to obtain proof that the consumer received homeownership counseling before extending a high-cost mortgage loan. There are two other homeownership counseling rules that are not related to HOEPA but are part of this proposal. The first is an amendment to Regulation X and would require the lender to provide a list of homeownership counselors to the borrower within three business days of applying for a mortgage. This would be another item to include as part of the early disclosures. The other amendment would be applied to Regulation Z and would require a first-time borrower to obtain homeownership counseling before receiving a negative amortization loan. A negative amortization loan is one in which the payment schedule can cause the loan’s principal balance to increase over time.

The High-Cost Mortgage and Homeownership Counseling Proposal set a deadline of Sept. 7; however, the comment period has been extended to Nov. 6 for the scope portion of the proposal. The reason for this comment period extension has to do with a separate recently-issued proposal (TILA-RESPA integration proposal) that proposes to change the finance charge definition which would affect the APR and points and fees for determining high-cost loans under this proposal. Access the notice for the extension of the comment period.

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Kelly Housh
Regulatory Compliance National Support
Minneapolis, MN


Ty Beasley
Regulatory Compliance National Leader
Dallas, TX