This a companion piece to a blog that I wrote a month ago regarding changes to MDIA, HOEPA and HERA.
Major changes to the Home Ownership and Equity Protection Act (HOEPA) went into effect October 1, 2009. These changes affect appraisals, HOEPA loans, servicing, and advertising and create a new category of loans called Higher Priced Mortgage Loans (HPMLs), a category that will occupy the space between prime loans and HOEPA loans. This is what I want to talk about today
The law’s implementing regulation (which we know as “Reg. Z”) has, since 1994, mandated disclosure requirements for high-cost closed-end mortgage loans, known as HOEPA – or Section 32 – loans. Now we have a new kind of loan called a higher-priced closed-end mortgage loan (HPML) – or – Section 35.
HOEPA loans are defined by the Federal Reserve Board – the agency that writes Regulation Z – as loans on which the APR exceeds the yield on a Treasury security of a comparable maturity by eight percentage points, or a loan on which total points and fees exceed eight percent of the loan amount. HOEPA loans aren’t prohibited – they’re just heavily regulated and subject to special disclosures and practices. The restrictions on these kinds of high-cost loans nearly eliminate them from the market. Many lenders note prominently on their rate sheets that they do not offer Section 32 loans.
HPMLs aren’t quite HOEPA loans, but they’re not prime loans either. An HPML is a first-lien loan that is 1.5 percentage points above the average prime offer rate (APOR) as computed from the Freddie Mac Primary Mortgage Market Survey (PMMS). For second-lien loans, the trigger is 3.5 percentage points above the APOR. Construction, bridge, reverses and HELOCs are excluded from the HPML restrictions. As of April 1, 2010, HPMLs must have an escrow account for taxes and insurance (October 1, 2010 for manufactured homes). Federal Reserve says the HPML category includes “virtually all closed-end subprime loans secured by a consumer’s principal dwelling,” and:
Prohibits a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate it as part of a “pattern or practice.”
- Prohibits a lender from relying on income or assets that it does not verify to determine repayment ability. It is not acceptable to rely only on a statement from the consumer.
- Bans any prepayment penalty if the payment can change during the initial four years.
- Requires that the lender establish an escrow account for the payment of property taxes and homeowners’ insurance for first-lien loans. (The lender may offer the borrower the opportunity to cancel the escrow account after one year.)
Many lenders don’t write HOEPA loans, but, for those who do, as of October 1, 2009, a lender cannot make a HOEPA loan without regard to a consumer’s ability to repay the loan. How do you verify ability to repay? Easy: verify income, assets and obligations. As well, the maximum prepayment penalty is reduced from five years to two and the principal and interest payment cannot change in the first four years of the loan.
Ok, so that was the official language, but what does this mean to you? Well, it protects the buyer from high cost loans under this section 35 however, I have a sneaky suspicion that it might have some hidden issues that will have to be worked out. One comes to mind. If the buyer is short to close, the lender can no longer (easily) raise the rate and credit back for closing costs. This is a stand by in our industry, of course we want the client to be ready to purchase however we have all run into situations where this happens and the remedy is required. So, if the borrower is tight o n closing funds, be wary this new “protection” from the government might kill the deal.
Cory Polk
Loan Officer
Plaza Loans
408-754-3847 Office
209-518-9462 Cell
cory@plazaloans.com
