HOEPA Does Math

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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
  consumers 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

• Non-finance charges 226.4(c)(7)
• Credit Insurance
• Finance Charges (other than interest)
• Broker Fees

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POINTS FEES TRIGGER

• 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 TRIGGER

• 3. 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 TRIGGER

• 4. 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 - (10,000300500) 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.docKey
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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 3.3110 13.31 (March 2005)
• T-Bill 3.318 11.31

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Questions???Thanks for your time