Pricing Data
HOEPA Status
In addition to requiring lenders to report
the rate spread on certain loans, the amendments to
Regulation C require for the first time that lenders
report whether a loan is covered by the provisions of
the Home Ownership and Equity Protection Act Amendments
(HOEPA), implemented by Regulation Z in Sections 32
and 34. HOEPA loans are also referred to as “high-cost
mortgages.” The reporting of HOEPA status is part
of the required reporting of pricing data.
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HOEPA covers closed-end
loans secured by the borrower’s principal
residence, other than home purchase loans,
with rates or fees above certain thresholds
or “triggers.” HOEPA has an
APR trigger and a points and fees trigger.
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The amendments to Regulation C are intended to identify
HOEPA loans. A loan is reportable as a HOEPA loan if:
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First-Lien Mortgage |
APR
triggers:
The APR at consummation exceeds the
yield for comparable Treasury securities
by more than 8 percentage points.
or
Points and fees trigger:
The total points and fees paid by
the consumer exceed the greater
of
8 percent of the loan amount or a
set dollar amount ($561 for 2008).
The exact dollar amount is adjusted
annually, based on the Consumer
Price
Index. The fee-based trigger was
recently amended by the Board
to include amounts
paid at closing for optional credit
life, accident, health or loss-of-income
insurance; and for other debt-protection
products written in connection
with
the credit transition. |
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Subordinate-Lien Mortgage |
APR
triggers:
The APR at consummation exceeds the
yield for comparable Treasury securities
by more than 10 percentage points.
or
Points and fees trigger:
The total points and fees paid by
the consumer exceed the greater
of
8 percent of the loan amount or
a set dollar amount ($561 for 2008).
The exact dollar amount is adjusted
annually, based on the Consumer
Price
Index. The fee-based trigger includes
amounts paid at closing for optional
credit life, accident, health or
loss-of-income insurance; and
for other debt-protection
products written in connection with
the credit transition. |
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REASON FOR CHANGE
Obtaining HOEPA status on loans is critical to address
fair-lending concerns related to loan pricing and to
better understand the mortgage market, including the
subprime market. Since the mid-1990s, the subprime mortgage
market has grown substantially, providing access to
credit for borrowers with less-than-perfect credit histories
and to other borrowers who are not served by prime lenders.
Along with the growth in the subprime market, there
have come increased variations in loan pricing and increased
reports of “predatory lending,” which covers
a variety of lending practices. Although there is no
generally accepted definition of “predatory lending,”
the term is used to refer to abusive lending practices
involving fraud, deception or unfairness.
IS THE LOAN A COVERED LOAN?
To determine if the APR exceeds the established thresholds,
lenders must continue to use the Federal Reserve Board’s
statistical release H.15 table, Selected Interest Rates.
Lenders should use the 15th of the month before the
month in which the application was received to identify
the appropriate Treasury security yield.
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Remember, for the rate
spread calculations, lenders are required
to use only the Treasury yields published
on the FFIEC web site. HOEPA will continue
to require lenders to use the H.15 Treasury
yields. |
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RELATIONSHIP TO REGULATION Z—TRUTH IN LENDING
Effective Oct. 1, 2002, amendments were adopted to
the provisions of Regulation Z that implement HOEPA.
The amendments to Regulation Z broadened the scope of
mortgage loans subject to HOEPA by adjusting the price
triggers used to determine coverage under the act. The
APR trigger was lowered by two percentage points for
first-lien mortgage loans, from 10 to 8 percentage points.
The points and fee-based trigger was revised to include
the cost of optional credit insurance and similar debt
protection products paid at closing.
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For additional reference
materials for HOEPA and additional amendments
to Regulation Z, see the revised examination
procedures for the Truth in Lending Act
(TILA), which were approved by the FFIEC.
The examination procedures can be used as
a tool to review an institution's policies
and procedures. Special attention should
be directed to the worksheets at the end
of the document that can be used to determine
if a transaction is covered by HOEPA requirements.
The “High-Cost
Mortgage Worksheets”
are excellent tools for determining if points
and fees will identify a mortgage as a covered
transaction. |
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REPORTING HOEPA STATUS ON THE HMDA-LAR
For reporting purposes, HMDA reporters will use the
following codes on the HMDA-LAR:
Code 1 – For loans that a
lender originates or purchases that are subject to
HOEPA restrictions because the APR or the points and
fees on the loan exceed the applicable HOEPA triggers.
Code 2 – For all other loans.
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Because HOEPA coverage
is based not only on the APR but also on
points and fees charged by the lender, some
loans are covered only because of the fees
charged. In many instances, the amount of
premiums for credit life insurance will
trigger HOEPA coverage. Industry comments,
received during the Board’s comment
period on amendments to Regulation C, indicated
roughly 30 percent of first-lien loans and
23 percent of the subordinate- lien loans
are covered by HOEPA only because of the
points and fees on the loans. Reporters
need to ensure that systems are in place
to capture both pieces of information: points/fees
and APR. |
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The following examples provide practical guidance for
determining if a loan is a HOEPA-covered transaction.
| EXAMPLE
ONE: APR
FACTS: Kerry and Mike Davis contact
Second Street Bank to obtain rates
for a closed-end home-equity loan
for new windows for their home. They
have paid off their mortgage, and
no other outstanding debts are associated
with the residence. The amount requested
is $6,000. The lender quotes an interest
rate of 11 percent for a term of five
years. The lender receives the loan
application on April 14 and originates
the loan on May 1. Based on the lender’s
terms and conditions, the corresponding
APR is 12 percent and total points
and fees are $300. |
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QUESTION |
Is the loan
covered by HOEPA? |
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ANSWER |
To determine
if a particular loan exceeds the HOEPA
APR trigger, the lender must compare
the APR to the yield on Treasury securities
with comparable periods of maturity
to the loan term. For comparison purposes,
the lender must reference yields from
the Federal Reserve’s H.15 release
as of the 15th day of the month immediately
preceding the month in which the application
was received. For this example, the
appropriate release to use would be
the one from March 15 since the application
was received on April 14. Assume that
the comparable yield is 3 percent.
The difference between the disclosed
APR of 12 percent and the comparable
yield of 3 percent is 9 percentage
points. This loan is covered by HOEPA
because the APR exceeds the 8 percent
rate trigger for first-lien mortgages.
Second Street Bank would report the
loan using Code 1 in the HOEPA status
field.
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| EXAMPLE
TWO: POINTS AND FEES
FACTS: Leonard and Wilma Dove contact
Pine Bluff State Bank to obtain rates
for a closed-end home-equity loan
for new windows for their home. They
have paid off their mortgage, and
no other outstanding debts are associated
with the residence. The amount requested
is $6,000. The lender quotes them
an interest rate of 9 percent for
a five-year term and receives an application
on Nov. 14 and originates on Dec.
1. Based on the lender’s terms
and conditions, the corresponding
APR is 10 percent and total points
and fees equal $508. |
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QUESTION |
Is this loan
covered by HOEPA? |
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ANSWER |
The lender must
reference the Oct. 15 H.15 to determine
if the loan exceeds the APR trigger
since the application was received
Nov. 14. For this example, assume
the appropriate yield is 3 percent.
The APR does not exceed the APR trigger.
However, the lender should determine
if the loan exceeds the points and
fees trigger. The points and fees
for this transaction total $508. The
total exceeds 8 percent of the loan
amount and the set dollar amount of
$499. Therefore, this loan is covered
by HOEPA. Pine Bluff State Bank would
report the loan using Code 1 in the
HOEPA status field.
Note: For purposes
of this example, the dollar amount
trigger is based upon $499 in 2004.
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