HOEPA High-Cost Mortgages and HPMLs on the SAFE Exam

Federal Mortgage-Related Laws make up 24% of the national SAFE MLO test, and two Regulation Z rules show up again and again in pricing questions: the Home Ownership and Equity Protection Act (HOEPA), which creates high-cost mortgages, and the rule for higher-priced mortgage loans (HPMLs). The names sound alike, the triggers use the same benchmark, and the exam likes to mix them up.

This guide covers how each is triggered, what each requires, and the number traps that decide most of these questions.

Two tiers of pricing protection

Both rules are part of the Truth in Lending Act and Regulation Z, and both compare a loan’s APR to the average prime offer rate (APOR). APOR is a benchmark built from the rates, points, and other pricing terms creditors are currently offering to low-risk borrowers. It is published weekly for each loan type and term, and you use the APOR for a comparable transaction as of the date the interest rate is set (the last rate lock before closing).

• HPML (Regulation Z section 1026.35) is the lower tier. The APR is meaningfully above prime, so the rule adds safeguards: escrows and stronger appraisal requirements.
• High-cost mortgage (section 1026.32, HOEPA) is the top tier. Pricing is far above prime or the fees are very large, so the rule adds a special disclosure, mandatory counseling, and a long list of banned loan terms.

A loan can be an HPML without being high-cost. Most high-cost first-lien loans are also HPMLs, because anything far enough above APOR to trip HOEPA’s rate test has already cleared the HPML threshold.

HOEPA: what it covers

HOEPA was added to TILA in 1994. The Dodd-Frank Act expanded it, and since January 10, 2014 it covers almost any consumer credit secured by the borrower’s principal dwelling: purchase loans, refinances, closed-end home equity loans, and home equity lines of credit (HELOCs). Second homes and investment properties are not principal dwellings, so they are outside HOEPA.

Four transactions are excluded even when they are secured by a principal dwelling:

• Reverse mortgages
• Loans to finance the initial construction of a dwelling
• Loans originated and financed by a Housing Finance Agency
• USDA Rural Housing Section 502 direct loans

The three HOEPA triggers

A loan is a high-cost mortgage if it trips any one of three tests:

The CFPB adjusts the dollar figures every January for inflation. The exam is far more likely to test the 6.5 / 8.5 / 5% / 36 months / 2% pattern than the exact dollar amounts.

What counts as points and fees

Points and fees are not the same as closing costs. In general they include finance charges the borrower pays other than interest (such as origination charges and discount points), compensation paid to the loan originator, certain real estate-related fees paid to the creditor or its affiliates, credit insurance premiums, and the maximum prepayment penalty the loan allows. Up to two bona fide discount points can be left out when the rate before the discount is close enough to APOR. Bona fide third-party charges paid to unaffiliated companies, such as most title and appraisal fees, generally are not counted.

Exam tip: HOEPA’s APR test says more than 6.5 points. A first-lien loan exactly 6.5 points over APOR does not trip the rate test. HPML thresholds say 1.5 or more, so a loan exactly 1.5 points over APOR is an HPML.

What a high-cost mortgage requires

The HOEPA disclosure and the three-day wait

The creditor must give a special HOEPA disclosure at least three business days before closing (or before a HELOC is opened). It includes the APR, the regular payment, any balloon payment, a variable-rate warning if it applies, and a warning in substance that:

• The borrower is not required to complete the loan just because they received the disclosure or signed an application.
• If they get the loan, the lender will have a mortgage on their home.
• They could lose the home, and any money put into it, if they do not meet their obligations.

For this rule, a business day means every calendar day except Sundays and federal legal public holidays. If terms change and the disclosure becomes inaccurate, a new disclosure and a new waiting period are generally required. The borrower can waive the wait only for a bona fide personal financial emergency, in a dated written statement in their own words, not a preprinted form.

Mandatory homeownership counseling

Before making a high-cost mortgage, the creditor must receive written certification that the borrower completed counseling on the advisability of the loan with a HUD-approved counselor. The counseling happens after the borrower receives the Loan Estimate or the HOEPA disclosure. The counselor cannot be employed by or affiliated with the creditor, and the creditor cannot steer the borrower to a particular counselor.

Ability to repay

A creditor may not make a high-cost mortgage without verifying the borrower’s ability to repay. For closed-end loans that is the general ability-to-repay rule; HOEPA applies a similar requirement to high-cost HELOCs. For the eight underwriting factors and how qualified mortgages work, see the Ability-to-Repay and QM guide.

Banned terms and practices on high-cost loans

This list is the core of most HOEPA questions. A high-cost mortgage generally may not include, or the creditor may not do, any of the following:

• Balloon payments, with narrow exceptions (certain bridge loans of 12 months or less, payment schedules adjusted to seasonal or irregular income, and some small creditors in rural or underserved areas).
• Negative amortization: payments that do not cover the interest, so the balance grows.
• Prepayment penalties of any kind.
• An interest rate increase after default.
• More than two periodic payments paid in advance from the loan proceeds.
• Financing points and fees into the loan amount.
• Late fees above 4% of the past-due payment, charged before the payment is 15 days late, or charged more than once for the same late payment.
• Fees to modify, renew, extend, amend, or defer the loan.
• Payoff statement fees in most cases; a payoff statement must generally be provided within 5 business days of a request.
• Calling the loan due except for fraud or material misrepresentation, failure to meet the repayment terms, or an action or inaction that harms the lender’s security.
• Recommending or encouraging default on an existing loan that the high-cost mortgage will refinance.
• Loan flipping: refinancing a high-cost mortgage into another high-cost mortgage within one year unless the new loan is in the borrower’s interest.
• Paying a home improvement contractor directly from the proceeds; payment must go to the borrower, jointly to the borrower and contractor, or through a third-party escrow.
• Structuring a loan to evade HOEPA, such as disguising a closed-end loan as an open-end line.

Penalties and assignee liability

HOEPA violations carry heavier consequences than ordinary TILA errors. A borrower can recover enhanced damages equal to all finance charges and fees paid, unless the creditor shows the failure was not material. Anyone who buys or is assigned a high-cost mortgage is generally subject to all claims and defenses the borrower could raise against the original creditor, which is a big reason many investors will not buy these loans at all. On a loan that carries a right of rescission, failing to give the HOEPA disclosure can extend that right up to three years.

Higher-priced mortgage loans (HPMLs)

An HPML is a closed-end consumer loan secured by the borrower’s principal dwelling whose APR exceeds APOR by:

The conforming limit is the maximum loan Freddie Mac can buy, set each year by FHFA. HELOCs are open-end credit, so they are not HPMLs, though they can still be high-cost under HOEPA.

Escrows for at least five years

A first-lien HPML must have an escrow account for property taxes and homeowners insurance for at least five years after closing. After that, the escrow can be canceled only at the borrower’s request, and only if the unpaid balance is less than 80% of the original property value and the borrower is not delinquent or in default. Exemptions include certain small creditors in rural or underserved areas, and a condo whose association carries a master insurance policy does not need an insurance escrow.

The HPML appraisal rule

For an HPML, unless an exemption applies, the creditor must:

• Get a written appraisal from a state certified or licensed appraiser who performs a physical visit of the interior of the home.
• Tell the borrower within three business days of application about the purpose of the appraisal and the right to a copy.
• Give the borrower a free copy of each appraisal at least three business days before closing. Unlike the general ECOA appraisal rule, an HPML borrower cannot waive this timing.
• Get a second appraisal, at no cost to the borrower and by a different appraiser, when the home is a quick resale (a “flip”): the seller bought it 90 or fewer days earlier and the price is more than 10% higher, or the seller bought it 91 to 180 days earlier and the price is more than 20% higher.

Qualified mortgages are exempt from the HPML appraisal rule, along with reverse mortgages, bridge loans of 12 months or less, initial construction loans, and small loans below an annually adjusted dollar amount. For the general appraisal-copy rule, see the ECOA and Regulation B guide.

HPML vs. high-cost side by side

How the exam asks it

1. APOR for a comparable first-lien conforming loan is 6.25%. The loan’s APR is 7.80%. Is it an HPML, a high-cost mortgage, or both?

Answer: HPML only. The spread is 1.55 points, which meets the 1.5-point HPML threshold but is nowhere near the 6.5-point HOEPA test.

2. A $300,000 refinance of a primary residence has $16,500 in points and fees. Is it a high-cost mortgage?

Answer: Yes. $16,500 is 5.5% of the loan amount, which exceeds the 5% points-and-fees trigger. One trigger is enough.

3. Which feature may a high-cost mortgage include? (A) A prepayment penalty in the first 24 months. (B) Negative amortization. (C) A fixed rate with fully amortizing payments. (D) Points and fees financed into the loan.

Answer: C. Prepayment penalties, negative amortization, and financed points and fees are all banned on high-cost loans.

4. A first-lien HPML closed four years ago. The borrower now owes 75% of the original value and asks to cancel the escrow. What happens?

Answer: The escrow stays. It must be kept for at least five years, even if the balance is below 80% and the borrower is current.

Common traps to watch for:

• “HOEPA only applies to refinances.” Outdated. Since 2014 it also covers purchase loans and HELOCs on a principal dwelling.
• “Points and fees” read as “all closing costs.” Loan originator compensation counts; most unaffiliated third-party charges do not.
• Counseling vs. a counselor list. Most mortgage applicants get a RESPA list of housing counselors; only a high-cost borrower must complete counseling before closing.
• Comparing the APR to the note rate or a Treasury yield. Both tests compare APR to APOR.
• Second homes. HOEPA and the HPML rules look at the principal dwelling.

Quick review

• Both rules compare APR to APOR as of the rate-set date.
• HPML: 1.5 or more first lien, 2.5 or more jumbo, 3.5 or more subordinate; closed-end only.
• HPML requirements: escrow for at least 5 years; interior-visit appraisal; free copy 3 business days before closing; second free appraisal on flips.
• High-cost: APR more than 6.5 over APOR (8.5 subordinate), points and fees over 5%, or a prepayment penalty past 36 months or over 2%.
• High-cost requirements: HOEPA disclosure 3 business days before closing; HUD-approved counseling; ability to repay.
• Banned on high-cost: balloons (with exceptions), negative amortization, prepayment penalties, rate increase on default, financed points and fees, late fees over 4%, modification fees.
• Remedies: enhanced damages of all finance charges and fees; assignees take on the borrower’s claims and defenses.

Practice this on MLO Pass

HOEPA and HPML questions come down to knowing which benchmark, which threshold, and which list of rules applies. A one-time $99 unlock of MLO Pass gives you about 1,154 questions across all five domains: Mortgage Loan Origination Activities 27%, Federal Mortgage-Related Laws 24%, General Mortgage Knowledge 20%, Ethics 18%, and Uniform State Content 11%. Pay once and keep it for life, with no subscription. The real test has 120 questions (115 scored), 190 minutes, and a passing score of 75%. Sign up to pass your test

Related study guides

• TILA and Regulation Z: APR, Ads and the Right of Rescission
• Ability-to-Repay and Qualified Mortgages: ATR/QM on the SAFE Exam
• NMLS Exam Math: Mortgage Formulas and Worked Examples

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