Mortgage reform targets high-cost mortgages


The Ability to Repay rule and Qualified Mortgages (QM) aren’t the only mortgage reform rules coming down the pike.

The landmark overhaul of federal mortgage regulations also includes protections for consumers with high-cost mortgages.

Mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and deployed by the Consumer Financial Protection Bureau, a batch of seven new mortgage regulations is designed to protect consumers from irresponsible, abusive and predatory mortgage lending and servicing practices.

Institutionalized wrong-doing largely contributed to the mortgage meltdown, the housing crisis and, ultimately, the Great Recession. The new rules, effective in January 2014, seek to avoid a repeat of practices that brought the economy to its knees.

Mortgage reform’s high-cost mortgage, counseling and escrow provisions zero in on changes to the The Home Ownership and Equity Protection Act (HOEPA).

The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 to address abuses in home-equity lending and refinances.

Dodd-Frank expanded HOEPA to cover home purchase loans and home equity lines of credit (HELOCs); revised HOEPA’s rate- and fee-thresholds for coverage; added a new coverage test based on a transaction’s prepayment penalties; and provided new limitations on risky loan features, as well as other new protections for high-cost mortgages.

Mortgage reform and high-cost rules

The CFPB’s finalized rules implement the amendments to HOEPA with these high-cost mortgage provisions:

What’s a high-cost mortgage?

• A first mortgage with an annual percentage rate (APR) that is more than 6.5 percentage points higher than the average prime offer rate – the rate at which people with good credit typically pay for a smaller first mortgage.

• A first mortgage for less than $50,000 for a personal property dwelling (such as a manufactured home), and has an APR more than 8.5 percentage points higher than the average prime offer rate for a similar mortgage.

• A second or junior mortgage with an APR that’s more than 8.5 percentage points higher than the average prime offer rate for a similar second mortgage.

• A mortgage for less than $20,000 with points and fees that exceed the lesser of 8 percent of your loan or $1,000; or a mortgage for $20,000 or more and the points and fees exceed 5 percent of your loan.

• Risky feature bans – With some exceptions, the rule generally bans balloon payments, and early-payoff penalties.

• Fees, practices bans and limitations – The rule bans fees for modifying loans, caps late fees at 4 percent of a payment that is past due, generally prohibits closing costs from being rolled into the loan amount, and restricts the charging of fees when consumers ask for a payoff statement. The rule also prohibits certain bad practices, such as encouraging a consumer to default on an existing loan to be refinanced by a high-cost mortgage.

Mortgage reform and counseling

• Homeownership counseling – The rule mandates that consumers receive homeownership counseling before taking out a high-cost mortgage. Lenders must also provide a list of homeownership counseling organizations to consumers shortly after they apply for a mortgage. Consumer who obtain counseling are better equipped to maintain homeownership than those who don’t get counseling – even in hard times.

Mortgage reform and escrow accounts

• Escrow rules – An escrow account is an account that a lender may set up to pay certain recurring property-related expenses on a consumer’s behalf, including property taxes and homeowner’s insurance.

Escrow accounts help consumers budget, better manage and make payments on time for large housing-related bills by breaking down large payments into smaller monthly payments.

With some exemptions, the new rule extends how long lenders must maintain escrow accounts on high-cost mortgages from a minimum of one year to a minimum of five years.

Mortgage reform consumer guides

For more information, check out the CFPB’s consumer guides and the complete text of the regulation.

“High Cost Mortgage Rule – What it Means For Consumers”

“Escrow Requirements Rule – What it Means For Consumers”

Mortgage reform regulations

“High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X)”

Also see: Ability to repay ‘Qualified Mortgages’ centerpiece of landmark mortgage reform

About the author

A DeadlineNews.Com Contributing Writer Shashank Shekhar is a San Jose, CA-based mortgage lender, author, national speaker and blogger. He has been named to National Mortgage Professional Magazine's "Top 25 Most Connected" and "Top 40 Under-40 Most influential" mortgage professionals. Shekhar's work is featured on,,, and his own Lending Expert Blog. Local and national media frequently tap him as an expert mortgage industry source. Connect with Shekhar on Facebook. Contact him at or call 1.408.615.0655.

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