HOEPA high-cost mortgage tests and borrower protections

HOEPA and Regulation Z define a high-cost mortgage through alternative APR, points-and-fees, and prepayment-penalty tests for covered consumer credit secured by a principal dwelling. Coverage triggers additional disclosures and substantive restrictions.

Coverage is more than a rate label

The Home Ownership and Equity Protection Act (HOEPA) rules in Regulation Z § 1026.32 apply to specified consumer credit transactions secured by the consumer’s principal dwelling, subject to exclusions. A loan is not high-cost simply because its rate feels expensive or its borrower has weak credit. The creditor must apply the regulation’s coverage tests to the transaction and the relevant date. HOEPA coverage can be triggered by an APR threshold, a points-and-fees threshold, or certain prepayment-penalty terms. Open-end plans and closed-end loans can both be within scope, but their calculations differ. Start by identifying the dwelling, purpose, lien, loan structure, and any exclusion before testing the thresholds.

The APR threshold test

One coverage route compares the annual percentage rate with the average prime offer rate (APOR) for a comparable transaction and tests whether the difference exceeds the regulatory margin for that lien and loan type. There are different margins for first liens, certain personal-property loans under a specified amount, and subordinate liens. APOR changes over time, and the applicable comparison date is governed by the rule. Do not use a static rate chart from a prior year. Obtain the correct APOR for the comparable transaction and date the rate is set, calculate the spread, and compare it with the applicable threshold. The APR used is determined under Regulation Z, not by comparing only the note rate.

The points-and-fees test

A loan can also become a high-cost mortgage when points and fees exceed a percentage or dollar threshold under § 1026.32. The rule defines which charges are included and provides a different calculation for loans below the annually adjusted loan-amount breakpoint. It also includes special treatment for certain mortgage insurance premiums and bona fide discount points. The amount used to select the breakpoint may differ from the total loan amount used to apply the percentage, so the calculation must follow the regulation’s definitions. Because dollar thresholds are adjusted annually, confirm the current-year figures from CFPB’s official threshold adjustment rather than relying on memory. Document the fee worksheet and exclusions used.

Prepayment penalties can independently trigger coverage

A transaction may qualify as high-cost if the contract permits a prepayment penalty more than 36 months after consummation or if total prepayment penalties can exceed 2% of the amount prepaid. This test is separate from the APR and points-and-fees tests. A loan can therefore be high-cost even if its rate and upfront charges fall below their thresholds. The rule also limits prepayment penalties on loans that are covered. Review the note and riders for the length, amount, and circumstances in which a penalty can be assessed. Do not assume that a small penalty is harmless if it can be imposed outside the permitted period.

Required disclosures and counseling

For a high-cost mortgage, the creditor must provide special disclosures before consummation and observe the applicable timing requirements. The disclosures explain the loan’s terms, costs, and consequences and must be clear enough for the consumer to review. Regulation Z also requires pre-loan counseling by a federally approved counselor for covered transactions before the consumer becomes obligated. The precise disclosure package depends on the transaction and current rules; compliance teams should use current model forms and CFPB resources. A generic Loan Estimate or Closing Disclosure does not necessarily replace the HOEPA disclosures. Track delivery and counseling certification as separate closing conditions.

Restrictions after classification

High-cost-mortgage status brings restrictions on loan terms and creditor practices. Regulation Z § 1026.34 addresses prohibited acts, including limitations on certain prepayment penalties and balloon payments, restrictions on recommending or extending a loan without regard to repayment ability, restrictions on fees for modification or deferral, and requirements around homeownership counseling and verification. Additional requirements can apply to late fees, payoff statements, and loan servicing. The specific restriction depends on the transaction and rule subsection, so do not memorize “high cost means higher disclosure only.” Classification should trigger a compliance review of both the loan terms and the origination process.

Examples of threshold analysis

A first-lien fixed-rate loan might fail the APR test but still cross the points-and-fees test once included charges are calculated. A subordinate-lien home-equity loan uses a different APR margin. A loan with a large discount may have some bona fide discount points treated differently if the regulatory conditions are satisfied. A contract allowing an excessive prepayment penalty can independently trigger the high-cost rules. In each case, use the current APOR, annual dollar breakpoint, correct loan amount, and fee definitions. The purpose of the sequence is to prevent an originator from dismissing coverage after checking only one test.

A safe exam sequence

Determine whether the loan is consumer credit secured by a principal dwelling and identify exclusions. Calculate the APR spread against the correct APOR and margin. Calculate points and fees using the current annual dollar breakpoint and applicable percentage. Inspect prepayment-penalty terms. If any test is met, classify the loan as high-cost, then check special disclosures, counseling, and prohibited terms or practices. Record the rate-set date and the source of each threshold. This sequence is more reliable than memorizing one threshold number that changes annually.

How to solve the exam scenario

Identify the loan, property, actor, triggering event, and controlling regulation. Work through each condition in order, use the applicable date and current primary rule text, and distinguish a required notice from an optional best practice. Record the calculation and any exception. Do not substitute a familiar label or a memorized historical amount for the rule that applies to the facts.

Counseling and closing controls

Before consummation, the creditor should verify that required homeownership counseling occurred with an approved counselor and that the required certification is in the file. The creditor should not rely on a referral list alone as proof the consumer completed counseling. Confirm the special HOEPA disclosures were provided with the applicable review period and that prohibited terms are removed from the note and riders. Review late fees, prepayment provisions, balloon features, and any compensation or modification charge. If any coverage input changes before closing—such as APR, loan amount, or a fee—the points-and-fees or rate calculation may change, so rerun the coverage test rather than relying on an earlier approval.