High-Cost Mortgage (HOEPA Loan)

Updated 2026-05-17

A "high-cost mortgage," also historically referred to as a "HOEPA loan" or "Section 32 loan," is a category of consumer credit transaction secured by a consumer's principal dwelling that is subject to enhanced consumer protections and restrictions under federal law. These provisions are primarily implemented through the Home Ownership and Equity Protection Act (HOEPA), which is part of the Truth in Lending Act (TILA) and detailed in Regulation Z (12 CFR § 1026.32).

The purpose of these provisions is to curb predatory lending practices associated with loans that have excessively high interest rates or fees, thereby shielding consumers from such practices. Unlike TILA's general approach of requiring disclosures without capping rates or fees, high-cost mortgages represent an exception where specific limitations and prohibitions apply.

When a loan is identified as a high-cost mortgage, it triggers enhanced consumer protections, specific disclosure requirements, and stringent restrictions on loan terms and practices under the HOEPA Rule.

Home Ownership and Equity Protection Act (HOEPA)

The Home Ownership and Equity Protection Act (HOEPA) is a federal statute enacted in 1994 as an amendment to the Truth in Lending Act (TILA) and Regulation Z (TILA). It establishes special protections for consumers who obtain certain high-cost mortgages. HOEPA is implemented through Truth in Lending Act (TILA) and Regulation Z (12 CFR 1026), specifically in Subpart E, Sections 1026.32 and 1026.34.

HOEPA was designed to combat predatory lending practices by imposing additional disclosure requirements and substantive limitations on loans that exceed specific rate or fee thresholds. These protections aim to ensure consumers receive adequate disclosures and are shielded from abusive loan terms.

Dodd-Frank Act Amendments and Expansion

The Dodd-Frank Wall Street Reform and Consumer Protection Act, specifically Title XIV, Subtitle C (Sec. 1431-1433), titled "High-Cost Mortgages," significantly revised the definition of "high-cost mortgages" and imposed additional requirements and restrictions on these loans. The Dodd-Frank amendments expanded the types of loans covered by HOEPA and strengthened its protections.

Key expansions include:

• Expanded Coverage: Dodd-Frank extended HOEPA's reach to include purchase-money mortgages and open-end credit plans, in addition to the refinance and home equity loans previously covered.
• New Protections: For loans that meet the definition of a high-cost mortgage, HOEPA triggers additional requirements and restrictions.

HOEPA Coverage Tests and Thresholds

A transaction is classified as a high-cost mortgage if its Annual Percentage Rate (APR), points and fees, or prepayment penalties exceed certain thresholds established by regulation. These thresholds are designed to identify loans that may pose a higher risk to consumers and are adjusted annually by the Consumer Financial Protection Bureau (CFPB) based on the Consumer Price Index (CPI).

Specific disclosure requirements and restrictions for high-cost mortgages are found in 12 CFR §§ 1026.32(a) and 1026.34 of Truth in Lending Act (TILA) and Regulation Z.

A loan is classified as a high-cost mortgage if it meets any of the following three triggers:

1. Annual Percentage Rate (APR) Coverage Test (12 CFR § 1026.32(a)(1))

A transaction is considered a high-cost mortgage if its Annual Percentage Rate (APR) exceeds the Average Prime Offer Rate (APOR) for a comparable transaction (as of the date the interest rate for the transaction is set) by more than a specified threshold.

APR Thresholds

For 2026, these thresholds are:

• 6.5 or more percentage points for first-lien loans over $82,775.
• 8.5 or more percentage points for first-lien loans under $82,775 (or less than $50,000, indexed for inflation) and secured by personal property (e.g., RVs, houseboats, and manufactured homes titled as personal property).
• 8.5 or more percentage points for junior-lien loans (or more than 8.5 percentage points for junior-lien mortgages).
• 3.5 or more percentage points for manufactured homes under $137,958.

Calculation of APR for HOEPA Coverage

The APR used for the HOEPA coverage test is calculated differently from the APR disclosed on standard TILA disclosures:

• Fixed-rate transactions: Use the interest rate in effect on the date the interest rate for the transaction is set.
• Variable-rate transactions (with index): Use the greater of the introductory interest rate (if any) or the fully-indexed rate (index value + maximum margin permitted at any time during the term).
• Variable-rate transactions (without index, e.g., step-rate): Use the maximum rate the applicant may pay during the term of the transaction.

Comparison Process

1. Determine the applicable APR threshold based on the loan type and amount.
2. Calculate the transaction's APR according to the special HOEPA rules.
3. Compare the transaction's APR to the APOR for a comparable transaction on the last date the interest rate was set or locked before consummation or account opening. The APOR is published by the FFIEC at http://www.ffiec.gov/ratespread.

For HELOCs, the HELOC's APR is compared to the APOR for the most closely-comparable closed-end transaction, considering whether the HELOC is fixed-rate or variable-rate and its term.

2. Points and Fees Coverage Test (12 CFR § 1026.32(a)(1))

A transaction is considered a high-cost mortgage if its total points and fees payable by the consumer exceed a specified percentage of the total loan amount or a fixed dollar amount, whichever is less.

Points and Fees Thresholds

For 2026, these thresholds are:

• 5 percent of the total loan amount for loans of $27,592 or more.
• The lesser of 8 percent of the total loan amount or $1,380 for loans less than $27,592 (or less than $22,052, indexed for inflation, where the total points and fees exceed the lesser of 8% of the total loan amount or $1,103, indexed for inflation).

These dollar amounts are adjusted annually for inflation and published in the Federal Register and can be found in the eCFR.

Calculation of Points and Fees

To calculate points and fees, generally add together amounts paid in connection with the transaction for the following categories of charges, known at or before consummation/account opening:

1. Finance Charge Items: Most items included in the finance charge under 12 CFR § 1026.4(a) and (b), with specific exclusions:
   • Interest or time-price differential.
   • Mortgage insurance premiums (MIPs), including federal (FHA, VA, USDA) and private (PMI), with specific rules for up-front PMI exceeding FHA limits.
   • Bona fide third-party charges not retained by the creditor, loan originator, or an affiliate, unless specifically required to be included elsewhere.
   • Bona fide discount points (up to 1 or 2 points, depending on the rate reduction).
2. Loan Originator Compensation: Compensation paid directly or indirectly by a consumer or creditor to a loan originator, with specific rules for mortgage brokers and the manufactured home retailer exemption.
3. Real Estate-Related Fees: Fees for title examination, abstract of title, title insurance, property survey, loan-related document preparation, notary, credit report, property appraisal/inspection, and amounts paid into escrow (except for taxes), unless the charge is reasonable, the creditor receives no direct/indirect compensation, and the charge is not paid to an affiliate.
4. Insurance Premiums/Debt Cancellation: Premiums for credit insurance, credit property insurance, other life/accident/health/loss-of-income insurance where the creditor is beneficiary, or debt cancellation/suspension coverage payments, if payable at or before consummation.
5. Maximum Prepayment Penalty: The maximum prepayment penalty that a consumer could be charged for prepaying the loan.
6. Prepayment Penalty in Refinance: Any penalties charged for prepaying a previous loan held or serviced by the same creditor or its affiliate.
7. Charges Paid by Third Parties: Include charges paid by third parties that fall within the definition of points and fees, with specific exclusions for seller's points.
8. Creditor-Paid Charges: Generally excluded, except for loan originator compensation paid by the creditor that is required to be included.

3. Prepayment Penalty Coverage Test

A transaction is considered a high-cost mortgage if the loan agreement permits a prepayment penalty to be charged more than 36 months after consummation or account opening, or in an amount more than 2% of the amount prepaid.

Definition of Prepayment Penalty

• Closed-end credit transactions: A charge imposed for paying all or part of the loan's principal before the date on which the principal is due. This definition aligns with that used in the Ability-to-Repay/Qualified Mortgage Rule (12 CFR § 1026.43).
• HELOCs: A charge imposed if the consumer terminates the HELOC prior to the end of its term.

The HOEPA Rule does not consider it a prepayment penalty if a creditor pays bona fide third-party charges on a consumer's behalf on the condition that the consumer does not fully prepay a closed-end credit transaction (or terminate a HELOC) sooner than 36 months after origination.

Prepayment penalties, specifically the maximum amount a consumer could be charged, must also be included in the calculation of points and fees for HOEPA coverage.

Types of Transactions Subject to Coverage

The HOEPA Rule generally applies to loans for which an application was received on or after January 10, 2014. It covers the following types of consumer credit transactions secured by a principal dwelling:

• Purchase-money mortgages
• Refinances
• Closed-end home equity loans
• Open-end credit plans (HELOCs)

Exempt Transactions

Certain transactions are exempt from HOEPA coverage, meaning they do not need to be tested against these criteria, though they may still be subject to other counseling rules:

• Reverse mortgages
• Construction loans (with specific conditions)
• Loans originated and directly financed by a Housing Finance Agency (HFA)
• Loans originated under the USDA Rural Development Section 502 Direct Loan Program

Key Restrictions and Requirements

Once a loan is designated as high-cost, it triggers significant additional consumer protections and restrictions, including:

• Mandatory Housing Counseling: Consumers must receive counseling from a HUD-approved counselor before entering into a high-cost mortgage. Lenders are required to provide applicants with a list of HUD-approved housing counseling organizations. This counseling helps borrowers understand the risks and obligations associated with these complex or potentially risky loans.
• Mandatory Pre-Closing Disclosures: Specific disclosures are required at least three business days before consummation or account opening.
• Prohibited Loan Terms: Certain loan features are prohibited, such as:
  • Balloon payments (with limited exceptions, generally prohibited for most HOEPA loans, especially those under five years).
  • Negative amortization.
  • Prepayment penalties (with limited exceptions, generally prohibited).
  • Due-on-demand clauses.
• Prohibited Practices: Lenders are prohibited from engaging in certain practices, such as:
  • Financing points and fees.
  • Charging fees for loan modifications.
  • Limitations on late fees and fees for payment deferrals.
  • Loan flipping (repeated refinancing with no tangible net benefit to the consumer, especially by the same lender within 12 months unless clearly in the borrower's interest).
  • Direct payment to home improvement contractors.
  • Recommending default on an existing loan.
• Ability to Repay (ATR) Requirements: Stricter ATR requirements apply; creditors are prohibited from extending a high-cost mortgage without regard to the consumer's ability to repay the loan.
• Increased Liability: Lenders who violate the rules face increased liability.
• Assignee Liability: Purchasers or assignees of high-cost mortgages may be subject to liability for violations committed by the original creditor.

Balloon-Payment High-Cost Mortgages

A Balloon-Payment High-Cost Mortgage (HCM) is a type of mortgage loan that includes a Balloon Payment feature and also meets the thresholds to be classified as a high-cost mortgage under HOEPA. While balloon payments are generally prohibited for most HOEPA loans, there are limited exceptions.

Eligibility for Small Creditors in Rural/Underserved Areas

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) expanded eligibility for Small Creditor Definition and Rural/Underserved Area Provisions (Regulation Z)s to offer balloon-payment HCMs.

Under the revised criteria, a small creditor may be eligible to rely on the special provision for balloon-payment HCMs if it originated at least one Covered Transaction secured by a first lien on a property located in a Rural Area Definition and Special Provisions for Small Creditors (Regulation Z) or Underserved Area in the preceding calendar year. For applications received before April 1 of a given year, eligibility can be based on either of the two preceding calendar years.

A temporary provision (now expired) allowed any small creditor, regardless of where it operated, to originate balloon-payment HCMs for applications received before April 1, 2016.

Loan Originator Compensation

For high-cost mortgages, compensation paid by a creditor to a loan originator not employed by the creditor is included in the calculation of points and fees. This is to prevent circumvention of the points and fees threshold.

Mortgage Loan Originator (MLO)s (MLOs) must be acutely aware of these thresholds and restrictions to ensure compliance and protect consumers. High-cost mortgages are distinct from Rural Area Definition and Special Provisions for Small Creditors (Regulation Z)s, which have different thresholds and requirements.

Connection to Qualified Mortgage (QM) Rule

The 12 CFR 1026 43 Refinancing Non Standard Mortgages Rule, implemented by the Consumer Financial Protection Bureau (CFPB) under Truth in Lending Act (TILA) and Regulation Z at 12 CFR 1026.43, interacts with HOEPA. While a loan can be considered a 12 CFR 1026 43 Refinancing Non Standard Mortgages even if it is a High Cost Mortgage (due to its Annual Percentage Rate), it must still meet all other QM criteria. The enhanced protections of HOEPA apply regardless of QM status if the loan meets the high-cost thresholds.

Citation: 12 CFR § 1026.32(a)(1); CFPB HOEPA Small Entity Compliance Guide (November 2018), Sections 1, 3; 12 CFR §§ 1026.31, 1026.32, 1026.34; 12 CFR § 1026.32(a)(1)(i), 1026.32(a)(1)(ii), 1026.32(a)(1)(iii), 1026.32(a)(3), 1026.32(b)(1), 1026.32(b)(2), 1026.32(b)(6)(i), 1026.32(b)(6)(ii), 1026.32(d)(6); CFPB HOEPA Small Entity Compliance Guide (November 2018), Sections 3.4, 3.4.1, 3.4.2, 3.5, 3.6, 3.7, 3.8, 3.9, 3.10.