What is the HOEPA Rule?

The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to the Truth in Lending Act (TILA) to address abusive practices in refinances and closed-end home equity loans with high interest rates or high fees.

Since HOEPA’s enactment, refinances or home equity mortgage loans meeting any of HOEPA’s high-cost coverage tests have been subject to special disclosure requirements and restrictions on loan terms, and consumers with high-cost mortgages have had enhanced remedies for violations of the law. Historically, these transactions have been referred to as “HOEPA loans” or “Section 32 loans.”

In 2010, the Dodd-Frank Act amended TILA by expanding the scope of HOEPA coverage to include purchase-money mortgages and open-end credit plans (i.e., home equity lines of credit, or HELOCs) and amended HOEPA’s coverage tests.  In January 2013, the CFPB issued the HOEPA rule that amended TILA’s Regulation Z to implement the Dodd-Frank Act’s changes to HOEPA.

Covered Transactions

In general, the following types of consumer credit transactions that are secured by a consumer’s principal dwelling are subject to HOEPA coverage under the Bureau’s HOEPA Rule. These types of transactions must be tested against the HOEPA coverage tests. If they meet any of the coverage tests, they must comply with the restrictions on loan terms and other protections relating to high-cost mortgages. These types of transactions are:

  • Purchase-money mortgages;
  • Refinances;
  • Closed-end home equity loans; and
  • Open-end credit plans (i.e., HELOCs);

Exempt Transactions

The Bureau’s HOEPA Rule exempts the following types of transactions from HOEPA coverage. You do not need to test these types of transactions against the HOEPA coverage tests. These types of transactions do not need to comply with the restrictions on loan terms and other protections relating to high-cost mortgages.

  • Reverse mortgages;
  • Construction loans;
  • Loans originated and directly financed by a Housing Finance Agency (HFA), as defined in 24 CFR 266.5; and
  • Loans originated under the U.S. Department of Agriculture’s (USDA’s) Rural Development Section 502 Direct Loan Program.

Note, however, that these exemptions can have qualifications:

  • The exemption for construction loans applies only to loans that finance the initial construction of a new dwelling. It does not extend to loans that finance home improvements or home remodels.
  • The exemption is straightforward for construction-only loans, but a bit more complicated for construction-to-permanent loans.
  • When you make a construction-to-permanent loan as two separate transactions, the construction loan transaction is exempt, but the permanent financing transaction is not. For a construction-to-permanent loan originated as a single transaction, coverage must be determined in accordance with appendix D to Regulation Z.
  • The exclusions for HFA and USDA loans apply only to loans that these organizations directly finance, not loans they guarantee or insure.

HOEPA applies to most types of consumer credit transactions secured by a consumer’s principal dwelling. As a result, mortgages secured by vacation or second homes are not covered.  Mortgages secured by manufactured housing (whether titled as real property or personal property) and other types of personal property (e.g., an RV or a houseboat) are subject to HOEPA coverage if the dwelling is the consumer’s principal dwelling.