Does HOEPA Apply to Second Mortgages?

Introduction

If you're a homeowner considering taking out a second mortgage or a homeowner with an existing second mortgage, you may have heard of the Home Ownership and Equity Protection Act (HOEPA). But what exactly is HOEPA, and does it apply to second mortgages? In this article, we'll explore the ins and outs of HOEPA, its implications for second mortgages, and what you need to know as a homeowner.

What is HOEPA?

The Home Ownership and Equity Protection Act (HOEPA) is a federal law enacted in 1994 to protect homeowners from predatory lending practices. It applies to certain closed-end home equity loans and refinances, including second mortgages, that meet specific criteria related to the loan's fees and interest rates.

HOEPA aims to ensure that borrowers receive clear disclosures about the terms and costs of their loans, as well as additional protections against abusive lending practices. The law is designed to prevent homeowners from being trapped in high-cost loans that they may struggle to repay.

Does HOEPA Apply to Second Mortgages?

Yes, HOEPA can apply to second mortgages, also known as home equity loans or lines of credit (HELOCs). However, not all second mortgages are automatically covered by HOEPA. There are specific criteria that a loan must meet to be considered a "HOEPA loan."

HOEPA Triggers

For a second mortgage to be considered a HOEPA loan, it must meet one of the following triggers:

1. Annual Percentage Rate (APR) Trigger: The loan's APR exceeds the Average Prime Offer Rate (APOR) for a comparable transaction by more than a specified amount. The threshold varies based on the type of loan and whether it is a first or subordinate lien.

2. Points and Fees Trigger: The total points and fees paid by the borrower exceed a certain percentage of the total loan amount. This percentage varies based on the loan amount but is generally around 5% for loans of $20,000 or more.

If a second mortgage meets either of these triggers, it is considered a HOEPA loan, and additional protections and requirements apply.

HOEPA Protections for Second Mortgages

When a second mortgage qualifies as a HOEPA loan, the lender must provide specific disclosures and follow additional rules designed to protect borrowers. Here are some key protections and requirements:

1. Special Disclosures: Lenders must provide a special HOEPA disclosure at least three business days before closing, outlining the loan's APR, total fees, and other important terms.

2. Restrictions on Certain Loan Terms: HOEPA loans cannot include certain risky features, such as negative amortization or balloon payments for loans with terms less than seven years.

3. Restrictions on Prepayment Penalties: Prepayment penalties are generally prohibited or limited for HOEPA loans.

4. Homeownership Counseling: Lenders must provide a list of approved homeownership counseling organizations to borrowers and obtain written certification that the borrower has received counseling.

5. Ability to Repay Requirement: Lenders must verify the borrower's ability to repay the loan, considering factors such as income, assets, and other debts.

It's important to note that HOEPA protections are in addition to other federal and state laws and regulations governing mortgages and lending practices.

Considerations for Homeowners

If you're a homeowner considering a second mortgage or have an existing second mortgage that may qualify as a HOEPA loan, here are some important considerations:

1. Review Loan Terms Carefully: Pay close attention to the APR, fees, and other loan terms. If your loan meets the HOEPA triggers, make sure you understand the additional protections and requirements.

2. Seek Homeownership Counseling: If your loan is a HOEPA loan, the lender must provide a list of approved counseling organizations. Consider seeking counseling to better understand the terms and risks of your loan.

3. Understand Prepayment Penalties: If your HOEPA loan includes prepayment penalties, be aware of the restrictions and limitations on these fees.

4. Know Your Rights: Familiarize yourself with the protections and requirements under HOEPA, as well as other applicable federal and state laws.

5. Shop Around: Compare offers from multiple lenders to ensure you're getting a fair deal and not being subjected to predatory lending practices.

Conclusion

The Home Ownership and Equity Protection Act (HOEPA) can apply to second mortgages, providing additional protections and requirements for homeowners who meet certain criteria related to the loan's fees and interest rates. If your second mortgage qualifies as a HOEPA loan, it's essential to understand your rights and the protections in place.

By being an informed borrower, seeking homeownership counseling if necessary, and thoroughly reviewing loan terms and lender practices, you can help protect yourself from predatory lending and make informed decisions about taking out a second mortgage.