Home Ownership and Equity Protection Act (HOEPA)

Purpose
“HOEPA, an amendment to TILA, was a congressional response to the substantive abuses of creditors offering alternative, typically high interest rate, home loans to residents in certain geographic areas. The statute was enacted to ensure that consumers most vulnerable to abuse would be afforded a safety net without impeding the flow of credit altogether. H.R. Rep. No. 103 652, at 159 (1994).” Fluehmann v. Associates Financial Services, 2002 U.S. Dist. LEXIS 5755 (D. Mass. March 29, 2002).

Sources of law
• 15 U.S.C. §§ 1602(aa), 1639, and 1641(d)(1);
• Federal Reserve Board Regulation Z (12 C.F.R. 226), particularly § 226.31 (“General Rules”) and § 226.32 (“Requirements for Certain Closed-End Home Mortgages”);
• The Federal Reserve Board’s Official Staff Commentary on Regulation Z. Ford Motor Credit v. Milhollin, 444 U.S. 555, 565 (1980) (“Unless demonstrably irrational, Federal Reserve Board staff opinions construing the Act or Regulation should be dispositive”).
Triggers for HOEPA Coverage
• APR more than 10% above comparable Treasury security rate (8% on first-lien loans closing on or after October 1, 2002) on the 15th day of the month before the lender received the loan application. 12 C.F.R. 226.32(a)(1)(i); 66 Fed. Reg. 65,617 (2001). (For Treasury rates, see U.S. Government Securities);
• “Points and fees” exceeding 8% of the “total loan amount.” 12 C.F.R. 226.32(a)(1)(ii).
“Points and fees” include:
• All prepaid finance charges. 12 C.F.R. 226.32(b)(1)(i);
• All compensation paid to mortgage brokers. 12 C.F.R. 226.32(b)(1)(ii);
• All items paid to the lender or to a lender affiliate. 12 C.F.R. 226.32(b)(1)(iii);
• “Total loan amount” is defined as the amount financed (principal minus prepaid finance charges) minus any additional HOEPA fees not already included in the finance charge, e.g., a bona fide and reasonable appraisal fee paid to the lender. Official Staff Commentary 12 C.F.R. 226.32(a)(1)(ii)-1. Lopez v. Delta Funding Corp., 1998 U.S. Dist. LEXIS 23318 (E.D.N.Y. Dec. 23, 1998).

Disclosure Requirement
A special HOEPA disclosure notice must be delivered to the consumer at least three business days prior to the closing of the loan. 15 U.S.C. § 1639(b); 12 C.F.R. 226.31(c). A signed statement to the effect that the consumer received the HOEPA notice creates a rebuttable presumption only. 15 U.S.C. § 1635(c). Bryant v. Mortgage Capital Resource Corp., 2002 U.S. Dist. LEXIS1566, at **11-17 (N.D. Ga. Jan. 14 ,2002); Williams v. Gelt, 237 B.R. 590 (E.D. Pa. 1999), Newton v. United Companies Financial Corp., 24 F. Supp. 2d 444, 448-51 (E.D. Pa. 1998).

The notice must inform the consumer that he need not enter into the loan, and that if he does enter the loan, he could lose his home and any money he has put in it. 15 U.S.C. § 1639(a); 12 C.F.R. 226.32(c)(1).

The notice must also include an accurate statement of APR, monthly payment and balloon payment amount, and maximum payment amount on a variable-rate loan. 15 U.S.C. § 1639(a)(2); 12 C.F.R. 226.32(c)(2)-(4); Official Staff Commentary 12 C.F.R. 226.32(c)(3)-2.
As of October 1, 2002, the notice must also state the total amount borrowed. 66 Fed. Reg. 65,618 (2001).

Prohibited Terms

The following terms are prohibited (or limited) by the statute and Regulation Z: prepayment penalties, default interest rate, balloon payments, negative amortization, prepaid payments, improvident lending, direct payments to home improvement contractors. 15 U.S.C. § 1639(c)-(h); 12 C.F.R. 226.32(d). Lopez v. Delta Funding Corp., 1998 U.S. Dist. LEXIS 23318 (E.D.N.Y. Dec. 23, 1998) (default interest rate); Newton v. United Companies Financial Corp., 24 F. Supp. 2d 444, 451-57 (E.D. Pa. 1998) (improvident lending).

Remedies

Failure to deliver the required HOEPA notice or inclusion of a prohibited term triggers an extended (three-year) right of rescission (described above). 15 U.S.C. § 1639(j); 12 C.F.R. 226.23(a)(3) n.48.; Bryant v. Mortgage Capital Resource Corp., 2002 U.S. Dist. LEXIS1566 (N.D. Ga. Jan. 14 ,2002); In re Barber, 266 B.R. 309 (Bankr. E.D. Pa. 2001); In re Jackson, 245 B.R. 23 (Bankr. E.D. Pa. 2000); In re Murray, 239 B.R. 728, 733 (Bankr. E.D. Pa. 1999).
In addition to regular TILA monetary damage remedies (see above), HOEPA violations give rise to “enhanced” monetary damages under 15 U.S.C. § 1640(a)(4), namely, all payments made by the borrower. In re Williams, 291 B.R. 636, 663-64 (Bankr. E.D. Pa. 2003).

Practice Tip: Remember that if you have a HOEPA rescission case, this effectively gives you “two bites at the apple”--you get to deduct all payments made twice before getting to your “HOEPA-adjusted” tender amount (once in calculating the “plain vanilla TILA” tender amount, and once in calculating “enhanced” HOEPA damages). Also, if you’re beyond three years and can’t rescind, you can still raise a HOEPA claim and deduct all payments made in the nature of defensive recoupment.

As with any TILA violation (see above), the rescission remedy runs against any assignee of the loan. 15 U.S.C. § 1641(c). In addition, where the loan documents demonstrate that the loan is covered by HOEPA coverage, assignees “shall be subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor.” 15 U.S.C. § 1641(d)(1). This provision mirrors the FTC Holder Rule and creates assignee liability for all state and federal claims and defenses. For monetary damages claims under TILA, it provides an exception to general rule that violations must appear on the face of the documents. Pulphus v. Sullivan, No. 02 C 5794, 2003 U.S. Dist. LEXIS 7080, at *64 n.11 (N.D. Ill. April 25, 2003); Dash v. Firstplus Home Loan Trust 1996-2, 248 F. Supp. 2d 489 (M.D.N.C. 2003); Cooper v. First Gov't Mortgage & Investors Corp., 238 F. Supp. 2d 50 (D.D.C. 2002); Bryant v. Mortgage Capital Resource Corp., 2002 U.S. Dist. LEXIS1566, at **17-22 (N.D. Ga. Jan. 14, 2002); Mason v. Fieldstone Mortgage Co., U.S. Dist. LEXIS 16415 (N.D. Ill. 2001); Vandenbroeck v. ContiMortgage Corp., 53 F.Supp. 965, 968 (W.D. Mich. 1999); In re Rodrigues, 278 B.R. 683 (Bankr. D.R.I. 2002); In re Jackson, 245 B.R. 23 (Bankr. E.D. Pa. 2000); In re Barber, 266 B.R. 309 (Bankr. E.D. Pa. 2001); In re Murray, 239 B.R. 728, 733 (Bankr. E.D. Pa. 1999).

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