The Home Ownership and Equity Protection Act (HOEPA) Explained

Read Time: 5 minutes

The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to the Truth in Lending Act (TILA) that became law in 1968. Both aimed to address abusive and aggressive practices in refinancing and closed-end home equity loans with high interest rates or high fees, commonly referred to as high-cost mortgages.

Passage of the Dodd-Frank Act in 2010 also amended TILA by expanding the scope of HOEPA coverage to include purchase-money mortgages and open-end credit plans such as home equity lines of credit. In January 2013, the Consumer Financial Protection Bureau issued a rule that formalized implementing the Dodd-Frank Act’s changes to HOEPA.

Known as the 2013 HOEPA Rule, it also implements two Dodd-Frank counseling requirements that may apply to creditors regardless of whether or not they make high-cost mortgages.

 Specifics of the HOEPA Act

Before issuing a high-cost mortgage, the lender must thoroughly review the borrower’s finances, including debt, credit history, income, assets, and other related items.

Since HOEPA’s enactment, refinances or home equity mortgage loans meeting any of HOEPA’s high-cost coverage tests are subject to special disclosure requirements and restrictions on loan terms. It also provides consumers with high-cost mortgages with enhanced remedies for law violations.

If a lender violates HOEPA concerning your loan, you may have the right to sue.

HOEPA loans are sometimes referred to as Section 32 loans, and to qualify for these protections, they must meet HOEPA’s coverage tests, which apply to transactions commencing on or after January 10, 2014.

HOEPA only applies to certain high-rate mortgage refinances and home equity loans for a principal residence, which are defined as follows:

  • First mortgage refinances carrying an annual percentage rate (APR) that’s more than eight percentage points higher than the rate on Treasury securities of the same maturity
  • Second mortgages carrying an APR that’s more than ten percentage points higher than the rate on Treasury securities of the same maturity
  • Mortgage loans on which the closing costs exceed 8 percent of the loan amount
  • Purchase-money mortgages
  • Closed-end home equity loans
  • Open-end credit plans such as home equity loans and HELOCs

These types of transactions must be tested against the HOEPA coverage tests. If they meet any of the coverage tests, the loan must comply with the high-cost loan restrictions on loan terms and other protections.

Some parts of the 2013 HOEPA Rule are related to homeownership counseling and don’t apply whether a loan is a high-cost mortgage. Under these requirements, creditors must provide a list of homeownership counseling organizations to most for most types of closed-end and open-end mortgage loan applicants within three days of application. 

As of 2013, HOEPA has extended coverage to HELOCs, subject to coverage tests. Any HELOCs that are high-cost mortgages are subject to most of the same requirements and restrictions as closed-end, high-cost mortgages.

The rule tells creditors how to calculate a consumer’s ability to repay a high-cost HELOC, as well as how to apply the prohibition against balloon payments to high-cost HELOCs with a draw period and a repayment period. 

How to Determine if a Transaction is a High-cost Mortgage

If it is determined that a transaction is not exempt from HOEPA coverage, then HOEPA coverage tests must be applied to determine if the transaction is a high-cost mortgage.

There are three separate HOEPA coverage tests.

One of these is if the transaction is a high-cost mortgage if its APR exceeds the Average Prime Offer Rate (APOR) for a comparable transaction on that date by more than:

  • 6.5 percentage points for first-lien transactions, generally
  • 8.5 percentage points for first-lien transactions that are for less than $50,000 and
  • secured by personal property (e.g., RVs, houseboats, and manufactured homes titled
  • as personal property)
  • 8.5 percentage points for junior-lien transactions

If the APR for your transaction is more than 6.5 or 8.5 percentage points (as applicable), higher than the APOR, then your transaction is a high-cost mortgage.

The amount of points and fees paid in connection with the transaction are considered a high-cost mortgage if its points and fees exceed the following thresholds:

  • 5 percent of the total loan amount for a loan amount greater than or equal to $20,000
  • 8 percent of the total loan amount or $1,000 (whichever is less) for a loan amount less than $20,000

These amounts were applied in 2013 but are adjusted annually for inflation.

HOEPA Exemptions

The 2013 HOEPA Rule exempts the following types of transactions from HOEPA coverage.

  • Reverse mortgages
  • Construction loans but only those loans that finance the initial construction of a new dwelling. It does not extend to loans that finance home improvements or home remodels.
  • Loans originated and directly financed by a Housing Finance Agency (HFA)
  • Loans originated under the U.S. Department of Agriculture’s (USDA’s) Rural Development Section 502 Direct Loan Program

The 3-Day Disclosure Rule

The 2013 HOEPA Rule continues to require lenders to provide specifically worded disclosures to consumers at least three days before the loan closes. These include a written notice stating that you’re not obligated to complete the loan, even though you’ve already signed the application. 

The notice must also inform you that you might lose your home in foreclosure if you don’t make timely loan repayments. Lastly, the lender must provide the APR, loan amount, and repayment schedule. 

If the prospective loan is an adjustable-rate mortgage, the disclosure must note the maximum monthly payment and include a statement that the rate and payment may increase.

The borrower must receive approved homeownership counseling that covers the disclosures as well as budgeting and affordability before closing the transaction.

Loan Features Prohibited by HOEPA

Lenders can charge you high interest rates based on your financial qualifications, but aren’t allowed to incorporate certain features that unduly inhibit your ability to repay the loan. Features which are specifically banned from HOEPA loans are:

  • Balloon payments
  • Negative amortization
  • Default rates that are higher than the loan’s regular rate
  • Default interest rebates that are calculated less favorably than non-default rebates
  • Due-on-demand clauses for reasons other than misrepresenting yourself in the loan application, causing damage to the home, or failing to make payments on time

Closing a high-rate mortgage with poor credit is not an ideal situation, but at least you know there’s legislation protecting you from getting gouged by ensuring you understand the terms of the agreement you’re about to enter into.

For More Details

Complete rules and regulations are outlined in the Consumer Protection Financial Bureau’s 2013 Home Ownership and Equity Protection Act (HOEPA) Rule.

Dan Rafter

Dan Rafter has covered real estate, mortgage and personal-finance news for more than 15 years, writing for the Chicago Tribune, Washington Post, Consumers Digest and many others. A graduate of the University Illinois with a degree in journalism, he is editor of Midwest Real Estate News magazine and blogs on commercial real estate for that publication at, in addition to being a contributor for

See How Much Home You Can Afford

Start Here

Connect with a lender to help determine your homebuying budget.