HOEPA is an amendment to TILA that deals with 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.

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).

Some examples of Points are:

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);

Disclosure Requirements

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 refutable presumption only. 15 U.S.C. § 1635(c). 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.

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, and direct payments to home improvement contractors. 15 U.S.C. § 1639(c)-(h); 12 C.F.R. 226.32(d).

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.

In addition to regular TILA monetary damage remedies, HOEPA violations give rise to "enhanced" monetary damages under 15 U.S.C. § 1640(a)(4), namely, all payments made by the borrower.

Tip: Remember that if you have a HOEPA rescission case, this effectively gives you double deduction-- you get to deduct all payments made twice before getting to your "HOEPA-adjusted" tender amount (once in calculating the TILA tender amount, and once in calculating 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, 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.

Statute of Limitations

1 year for affirmative claims. 15 U.S.C. § 1640(e);

3 years for rescission. Beach v. Ocwen, 523 U.S. 410 (1998);

Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.