As regulators, our primary responsibility is to ensure that financial institutions are operating in a compliant manner and that consumers are being treated fairly. When it comes to high-cost mortgages, we take this responsibility very seriously and want to remind financial institutions of the requirements for these types of loans.
High-cost mortgages are loans in which the interest rate or fees exceed specific amounts. These loans are subject to additional requirements under the Home Ownership and Equity Protection Act (HOEPA), which is part of the Truth in Lending Act (Regulation Z). Under those requirements, a loan is considered "high-cost" if the borrower's principal dwelling secures the loan and one of the following is true:
- The loan's annual percentage rate (APR) exceeds certain criteria.
- The amount of points and fees paid in connection with the transaction exceeds certain thresholds.
- The prepayment penalties the lender charges under the loan are greater than a specific amount or can be charged after a certain period.
If a loan qualifies as a high-cost mortgage, lenders must provide for certain additional consumer protection measures which include:
- Specific disclosure requirements.
- Restrictions on transaction terms.
- Restrictions on fees and practices.
- Ability-to-repay requirements.
- A pre-loan counseling requirement.
It is the responsibility of financial institutions to ensure compliance with all applicable requirements as outlined in Regulation Z, 12 CFR, Sections 1026.32 and 1026.34 when originating high-cost mortgages. Failure to do so can result in significant legal and financial consequences, such as borrower restitution.