Final rules issued by the Consumer Financial Protection Bureau on high-cost mortgages are expected to help prospective borrowers better understand the real homeownership costs while protecting them from harmful practices that can trap them in high-cost mortgages.
The Home Ownership and Equity Protection Act enacted in 1994 has deterred high-rate and high-fee lending on home-equity loans — with the high-cost share of HELs falling to just 0.2 percent in recent years.
The Dodd-Frank Wall Street Reform and Consumer Protection Act expanded HOEPA protections to purchase financing and home equity lines of credit. In addition, Dodd-Frank revised HOEPA rate and fee thresholds for coverage, added a new coverage test based on prepayment penalties and provided new limitations on risky loan features.
On Thursday, the CFPB announced that rules to implement the Dodd-Frank HOEPA amendments have been finalized.
Under the new rules, high-cost mortgages cannot have prepayment penalties or balloon payments.
Exceptions to the prohibition of balloon payments include certain types of loans made by creditors serving rural or underserved areas.
The CFPB said that fees for loan modifications are not allowed on high-cost loans. Also prohibited are late fees in excess of 4 percent of the past-due payment and fees charged for payoff statements.
In addition, the rule generally doesn’t allow closing costs to be rolled into the loan amount and prohibits bad practices like encouraging a refinancing borrower to default on an existing loan.
Housing counseling is required by the rule before a high-cost loan can close. The CFPB said it is implementing a Dodd-Frank requirement that lenders provide a list of homeownership counseling organizations to consumers shortly after they apply for a mortgage.
Other Dodd-Frank requirements being implemented by the CFPB deal with escrow accounts.
Current regulations require that escrow accounts be maintained by lenders for at least one year. The final rule released Thursday extends the required duration of the escrow account to five years.
Exempted from the escrow rule are lenders that operate predominantly in rural or underserved areas.
