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HOEPA Does Math

High Cost Mortgage Rules

Regulation Z - Section 32

Calculations

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Background• Enacted in 1994 as the Home Ownership

and Equity Protection Act

• In response to evidence of abusive lending practices in the home-equity lending market

• Implemented in Section 226.32 of Regulation Z in October 1995

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Covered Loans

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Covered Loans

• 1st and subordinate Liens

• Loans for home improvement or any other purpose other than to purchase or construction the consumer’s principal dwelling

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Exemptions

• Does not apply to the following loans:– a residential mortgage transaction.

• A loan secured by the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling.

– a reverse-mortgage transaction subject to section 226.33.

– an open-end credit plan subject to subpart B of Regulation Z.

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APR TRIGGER

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APR Trigger

• First lien loans secured by the consumers principal dwelling. – The APR trigger is 8 percentage points

above the rate for Treasury Securities with comparable maturity

• Subordinate-lien loans – The rule is 10 percentage points above the

rate for Treasury Securities with comparable maturity

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APR Trigger

• To determine the yield on comparable Treasury securities:– Creditors may use the yield on actively traded

issues adjusted to constant maturities published in the Board's “Selected Interest Rates” (statistical release H-15).

– Creditors must use the yield corresponding to the constant maturity that is closest to the loan's maturity.

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APR Trigger

• Example:– Treasury securities 7 and 10 year

maturities

– 8-year mortgage loan - compared with the yield of securities having a 7-year maturity

– 9-year mortgage loan - compared with the yield of securities having a 10-year maturity

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APR Trigger• 15th Day

– The yield on Treasury securities as of the 15th day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor

• When 15th not a business day. – If the 15th day of the month immediately preceding

the application date is not a business day, the creditor must use the yield as of the business day immediately preceding the 15th.

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POINTS & FEES TRIGGER

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POINTS & FEES TRIGGER

1. Non-finance charges – 226.4(c)(7)

2. Credit Insurance

3. Finance Charges (other than interest)

4. Broker Fees

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POINTS & FEES TRIGGER1. Non-Finance Charges -226.4(c)(7)

• Paid only to Bank or Affiliate• For example: Appraisal fees when appraisal is

conducted by the bank or its affiliate

2. Insurance• Premiums or other charges paid for credit life,

accident, health, or loss-of-income insurance, or debt-cancellation coverage, written in connection with the credit transaction – 226.32(b)(iv)

• Credit insurance premiums are include in this calculation whether paid in cash or financed (see commentary)

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POINTS & FEES TRIGGER3. Finance Charges

• This is any charge that is listed under the finance charge definition in Regulation Z (except interest

– Points– Service fees, etc.

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POINTS & FEES TRIGGER4. Broker Fees– Compensation paid by a consumer to a mortgage

broker (directly or through the creditor for delivery to the broker) is included in the calculation whether or not the amount is disclosed as a finance charge.

• Mortgage broker fees that are not paid by the consumer are not included.

• Mortgage broker fees already included in the calculation as finance charges under this section need not be counted again.

• Total Points & Fees • Includes the of all of the amounts listed on the

previous slides and this one.

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DISCLOSURES

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Disclosures• Current Requirements

• (1) Notice (stock language)– “You are not required to complete this agreement merely

because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.”

• (2) Annual Percentage Rate – APR

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Disclosures • Current Requirements

• (3) Regular payment; balloon payment– The amount of the regular monthly payment and the amount

of any balloon payment.(based on amount borrowed)

• (4) Variable Rate – a statement that the interest rate and monthly payment may

increase, and the amount of the single maximum monthly payment, based on the maximum interest rate required to be disclosed under section 226.30.

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Disclosures• (5) Amount Borrowed

– The total amount the consumer will borrow, as reflected in the face amount of the note. If the amount includes premiums or other charges for optional credit insurance or debt-cancellation coverage, that fact shall be stated. ($100 tolerance)

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THREE DAY RULE

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Three Day Rule -226.31(c)

• Disclosures Form– High cost mortgage disclosure shall be provided at

least three business days prior to consummation of a covered mortgage transaction.

• Change in terms. – Prior to consummation, if the creditor changes any

term that makes the disclosures inaccurate, new disclosures shall be provided

• Must wait another three days

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Disclosure Timing Rule• Staff Commentary • A new paragraph has been added that

indicates if the consumer purchases optional credit insurance and as a result the monthly payment differs from what was previously disclosed under Section 32:– re-disclosure is required; and

– new 3-day waiting period applies.

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Disclosure Waiver• Consumer's waiver

– The consumer may, after receiving the disclosures required by paragraph (c)(1) of this section, modify or waive the three-day waiting period between delivery of those disclosures and consummation

• if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency.

• Printed forms for this purpose are prohibited, except when creditors are permitted to use printed forms pursuant to section 226.23(e)(2). (These are selected Federal disaster areas.)

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Model Disclosure Form

• Appendix H of Regulation Z contains Model form H-16 to meet the disclosure requirements of Section 226.32(c)

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CALCULATIONS

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Two Calculations

• Total Loan Amount Calculation

• Points and Fees Calculation

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Total Loan Amount Calculation

• Amount Financed– Less:

• 4(c)(7) Charges (financed by the creditor)• Credit Insurance (financed by the creditor)

• = the Total Loan Amount

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Total Loan Amount Calculation

• $10,000 original loan request

– $300 Appraisal fee - financed & paid to lender

– $500 Credit life insurance – financed

– $400 Points - finance charge

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Total Loan Amount Calculation

• $10,800 - (10,000+300+500) all financed• - 400 - prepaid finance charge• $ 10,400 - Amount financed• - 300 - Appraisal cost (financed)• - 500 - Credit insurance (financed)• $ 9,600 - Total Loan Amount

– Total Loan Amount is used in the points and fees calculation

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Points & Fees Calculation

• 8% of “Total Loan Amount”• Annual adjustment ($528-2006)• Total Points & Fees

– If the total points & fees amount exceeds the greater of the the 8% number or the annual adjustment:

• it is a high cost mortgage • Subject to Sections 226.31, 32, & 34 of Regulation Z.

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Sample Calculation Forms

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Form link

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Example Exercise

• February 15, 200x• Loan Amount

– $5200.00 (includes $200 credit insurance financed)

• Number Payments 120• Simple Interest 14%• Payment Amount$80.74• APR 14.77%

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Example Exercise• Closing Costs Paid at Consummation

• 1Point $52 Paid to Bank

• Service Fee $100 Paid to Bank

• Appraisal $250 Paid to Bank

• Doc Prep $100 Paid to Bank

• Title Ins $200 ABC Insurance Co.

• Credit Report $50 TRW

• Flood Inspection $30 TransAmerica

• Courier Fee $32 UPS

• Pest Inspection $45 Acme Inc.– Assume all fees are reasonable in amount and the non-bank companies listed

are not affiliated with the bank. Flood, Courier, and Pest fees are not considered prepaid finance charges for closing services.

– Assume a T-bill rate of 5.25%

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EXAMPLE-HCM.doc

Key

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Rates Today

• $5,200 $150 Prepaid FC 120 Months– $200 Credit Insurance Financed

• 9% Simple 9.69 APR

• 8% Simple 8.68 APR

• T-Bill 3.31+10= 13.31% (March 2005)

• T-Bill 3.31+8= 11.31%

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Questions???Thanks for your time