HOEPA Loans: What They Are Also Known As
Navigate high-cost mortgages. Learn how federal law defines and regulates specific loans to protect consumers.
The Home Ownership and Equity Protection Act (HOEPA), enacted in 1994 as an amendment to the Truth in Lending Act (TILA), is a federal law created to combat abusive practices within the mortgage lending sector. This legislation aims to safeguard consumers from predatory lending, particularly regarding certain high-cost mortgages. Its primary objective is to offer protection and guidance to borrowers who might otherwise be vulnerable to unfavorable loan terms.
Other Names for HOEPA Loans
Loans falling under HOEPA are commonly referred to as “high-cost mortgages” or “high-cost loans.” These terms reflect the criteria that trigger HOEPA’s applicability, indicating the loan carries higher-than-average interest rates or fees. While “HOEPA loans” and “Section 32 loans” were historically used, “high-cost mortgages” is now the consistent terminology, especially following the Dodd-Frank Act.
Identifying a HOEPA Loan
A mortgage is identified as a HOEPA loan, or high-cost mortgage, if it meets specific thresholds related to its Annual Percentage Rate (APR), points and fees, or prepayment penalties. These “triggers” are designed to capture loans that pose a higher risk to consumers due to their cost structure. The thresholds are adjusted annually to account for inflation.
One trigger involves the loan’s APR compared to the Average Prime Offer Rate (APOR), a benchmark rate for low-risk mortgages. For most first-lien mortgages, a loan becomes high-cost if its APR exceeds the APOR by more than 6.5 percentage points. For subordinate-lien mortgages, such as a second mortgage or home equity line of credit (HELOC), or for first-lien loans under $50,000 secured by personal property, the threshold is 8.5 percentage points above the APOR.
The second trigger focuses on the total points and fees charged in connection with the loan. For loans of $26,968 or more in 2025, a mortgage is considered high-cost if its points and fees exceed 5% of the total loan amount. For loans less than $26,968, the threshold is the lesser of 8% of the total loan amount or $1,348. These points and fees include various charges like origination fees, discount points, and certain credit insurance premiums.
A third trigger relates to prepayment penalties. A loan is classified as a high-cost mortgage if it allows for a prepayment penalty to be charged more than 36 months after the loan closes, or if the penalty exceeds 2% of the amount prepaid.
Key Protections for HOEPA Loans
Once a loan is identified as a high-cost mortgage, lenders must adhere to a set of consumer protections and are prohibited from including certain terms. Lenders are required to provide specific disclosures to the borrower at least three business days before the loan is finalized.
These disclosures include a written notice stating that the loan is not yet final, even if the application has been signed, giving the borrower time to decide. The notice must also warn the borrower that they could lose their home if they fail to make payments. Lenders must clearly disclose the loan’s APR, the regular payment amount (including any balloon payments), and the total loan amount. For variable-rate loans, the disclosure must explain how the rate and monthly payment might increase, up to a maximum amount.
HOEPA also prohibits several loan terms and practices that historically contributed to abusive lending. These include most balloon payments, negative amortization (where the loan balance increases over time), and increasing the interest rate after a default. Lenders are generally prohibited from charging prepayment penalties, fees for loan modifications, or fees for payoff statements. Lenders are also restricted from directly paying home improvement contractors from the loan proceeds.
Another protection is the mandatory homeownership counseling requirement. Before a high-cost mortgage can be finalized, borrowers must complete counseling with a U.S. Department of Housing and Urban Development (HUD)-approved housing counseling agency. Lenders are obligated to provide a list of at least ten such agencies within three business days of receiving a loan application.