What Is a High-Cost Mortgage & Its Borrower Protections?

A high-cost mortgage is a specific category of home loan subject to enhanced consumer protections. It is a legal classification designed to safeguard borrowers from harmful lending practices that could lead to financial distress or loss of their home. Understanding this classification is important, as it triggers distinct rules and safeguards for the borrower’s benefit.

Defining High-Cost Mortgages

A high-cost mortgage is a legal designation established under the Home Ownership and Equity Protection Act (HOEPA) of 1994. HOEPA, an amendment to the Truth in Lending Act (TILA) implemented through Regulation Z, was enacted to combat predatory lending practices.

This framework identifies mortgage transactions that carry a higher risk to the consumer. When a loan meets these criteria, it triggers a mandatory set of federal protections. These protections aim to prevent practices that could strip homeowners of their equity or lead to unaffordable payment obligations.

Identifying High-Cost Mortgage Triggers

A mortgage is classified as “high-cost” under HOEPA if it meets specific numerical thresholds related to its Annual Percentage Rate (APR) or the amount of points and fees charged. These thresholds are adjusted annually by the Consumer Financial Protection Bureau (CFPB). For applications received on or after January 1, 2025, the criteria are:

The APR trigger applies if the loan’s APR exceeds the Average Prime Offer Rate (APOR) by a certain margin. For a first-lien mortgage, the APR must exceed the APOR by more than 6.5 percentage points. For a subordinate-lien mortgage, or a first-lien loan secured by personal property (like a manufactured home) with a loan amount less than $50,000, the APR must exceed the APOR by more than 8.5 percentage points.

The points and fees trigger applies if total charges exceed a percentage of the loan amount or a fixed dollar amount. For 2025:
If the total loan amount is $26,968 or more, points and fees must exceed 5% of the total loan amount.
If the total loan amount is less than $26,968, points and fees must exceed the lesser of 8% of the total loan amount or $1,348.
Points and fees include origination fees, broker compensation, certain closing costs, and credit life insurance premiums. A loan is also high-cost if it includes a prepayment penalty chargeable more than 36 months after closing, or if total prepayment penalties exceed 2% of the amount prepaid.

Mandatory Borrower Protections

Once a mortgage is designated as high-cost under HOEPA, specific enhanced consumer protections and restrictions apply to the lender. These are legal requirements intended to safeguard the borrower throughout the loan process and during the life of the loan.

Lenders are required to provide specific disclosures to the borrower at least three business days before the loan closing. These disclosures must include a clear warning about the high-cost nature of the loan and inform the borrower of their right to receive counseling. Before the loan can close, the borrower must receive counseling from a housing counselor approved by the Department of Housing and Urban Development (HUD). This counseling ensures the borrower understands the terms and risks associated with the high-cost mortgage.

HOEPA also prohibits certain loan terms and practices in high-cost mortgages. Most balloon payments are forbidden, with limited exceptions, as is negative amortization, where the loan balance increases even with regular payments. Prepayment penalties are largely prohibited, and lenders cannot increase interest rates after a default. Practices such as loan flipping, which involves repeated refinancing of a loan without a tangible net benefit to the borrower, are also restricted. Lenders are also prohibited from directly paying a home improvement contractor from the loan proceeds without the borrower’s written consent or a joint payment.

Loan Exemptions and Lender Violations

While HOEPA provides broad protections, certain types of loans are exempt from its high-cost mortgage definition. These exemptions recognize that some mortgage products or programs inherently pose different risks or are already subject to other regulatory oversight. Common exemptions include reverse mortgages and loans solely intended to finance the initial construction of a dwelling.

Loans directly financed and originated by state Housing Finance Agencies (HFAs) are often exempt, as these entities typically have public service missions and consumer protection built into their operations. Loans made under the United States Department of Agriculture’s Rural Housing Service section 502 Direct Loan Program are generally not subject to HOEPA’s high-cost rules. Short-term bridge loans, typically less than one year, connected to the acquisition or construction of a principal dwelling may also be exempt.

If a lender fails to comply with HOEPA’s requirements for a high-cost mortgage, borrowers may have significant legal remedies. Borrowers can sue the lender for actual damages suffered due to the violation. They may also be entitled to statutory damages, which can include all finance charges and fees paid on the loan. In many cases, the lender could also be responsible for the borrower’s attorney’s fees.

A borrower might also have an extended right to rescind the loan, potentially up to three years, if the lender failed to provide proper disclosures or committed other HOEPA violations. This extended rescission period allows a borrower to cancel the mortgage and receive a refund of fees and charges. Furthermore, liability for HOEPA violations can, in certain circumstances, extend to assignees or purchasers of the loan, meaning that even if the loan is sold, the new holder could be responsible for the original lender’s non-compliance.