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High Priced vs. High Cost Mortgages

By Erin Regan

You may have heard the terms High Priced Mortgage or High Cost Mortgage thrown around recently. A simple glance through the Consumer Financial Protection Bureau’s stack of mortgage rules will expose you to the terms, but what do they mean? How will new CFPB rules affect these types of mortgages?

High Priced Mortgage Loan (HPML)

A closed-end consumer transaction secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate (APOR – published weekly by bureau 8/12 4.46) for a comparable transaction as of the date the interest rate is set:

 

  • By 1.5 or more percentage points for loans secured by 1st lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac (5.96)
  • By 2.5 or more percentage points for loans secured by 1st lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac (6.96)
  • By 3.5 or more percentage points secured by a subordinate lien (7.96)

Escrow Accounts

HPMLs require escrow accounts for property taxes and mortgage-related insurance required by the creditor (hazard/mortgage insurance).

Exceptions:

  • Secured by co-op
  • Financing initial construction
  • Bridge loan
  • Reverse mortgages
  • Condos/PUDs/Common Interest Dwellings with governing association with obligation to maintain a master policy insuring all dwellings

Cancelation:

  • Termination of underlying debt
  • At least 5 years after termination request
  • Unpaid balance is less than 80% of original value
  • Not currently delinquent or in default

Additional Disclosures

None
 

High Cost Mortgage Loan (High Cost)

A consumer credit transaction that is secured by the consumer’s principal dwelling and in which either:

  • The APR at consummation will exceed by more than 8 percentage points for first-lien loans, or by more than 10 percentage points for subordinate-lien loans, the yield on Treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor; or
  • The total points and fees payable by the consumer at or before loan closing will exceed the greater of 8% of the total loan amount, or $400; the $400 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1.

As of January 2014:

A consumer credit transaction that is secured by the consumer’s principal dwelling is a high-cost mortgage if any of the following tests are met:

  • The APR exceeds the applicable APOR by more than 6.5 percentage points for most first-lien mortgages, or by more than 8.5 percentage points for a first mortgage if the dwelling is personal property and the transaction is for less than $50,000; or
  • The transaction’s APR exceeds the applicable APOR by more than 8.5 percentage points for subordinate or junior mortgages; or
  • The transaction’s points and fees exceed 5% of the total transaction amount, or for loans below $20,000, the lesser of 8% of the total transaction amount or $1,000 (with the dollar figures also adjusted annually for inflation); or
  • The credit transaction documents permit the creditor to charge or collect a prepayment penalty more than 36 months after transaction closing or permit such fees or penalties to exceed, in the aggregate, more than 2 percent of the amount prepaid.

Points and Fees

For the purposes of High Cost loans, points and fees means:

 

  • All items required to be disclosed under 1026.4(a) and 1026.4(b), except interest or the time-price differential;
  • All compensation paid to mortgage brokers;
  • All items listed in 1026.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no director or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor; and
  • Premiums or other charges for credit life, accident, health, or loss-of-income insurance, or debt-cancellation coverage (whether o not the debt-cancellation coverage is insurance under applicable law) that provides for cancellation of all or part of the consumer’s liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction.

Limitations

A High Cost Mortgage loan shall not including the following terms:

  • Balloon payments – For a loan with a term of less than 5 years, a payment schedule with regular periodic payments that when aggregated do not fully amortize the outstanding principal balance
  • o Exception – loans less than one year
  • Negative amortization
  • Advance payments – a payment schedule that consolidates more than 2 periodic payments and pays them in advance from the proceeds
  • Increased interest rate after default
  • Rebates – a refund calculated by a method less favorable than the actuarial method
  • Prepayment penalties
  • Exceptions:
  • o The penalty will not apply after 2 year period following consummation
    o Penalty will not apply if source of prepayment funds is refinancing by creditor
    o At consummation, the consumer’s total monthly debt payments do not exceed 50% of the consumer’s monthly gross income
    o Amount of periodic payment of principal or interest or both may not change during 4 year period following consummation
  • Due on Demand clause
  • Exceptions:
  • o Fraud or material misrepresentation by consumer in connection with loan
    o Consumer fails to meet the repayment terms of the agreement for any outstanding balance
    o There is any action or inaction by the consumer that adversely affects the creditor’s security for the loan, or any right of the creditor in such security

     

    Additional Disclosures

    Yes, both state & federal

    TIL requires all mortgage broker fees to be included in the finance charge. HOWEVER, Creditors sometimes compensate mortgage brokers under a separate arrangement with those parties. Creditors may draw on amounts paid by the consumer, such as points or closing costs, to fund their payment to the broker. Compensation paid by a creditor to a mortgage broker under an agreement is not included as a separate component of a consumer’s total finance charge.

Penner Law Firm
(Milford, CT Office)
185 Plains Rd. Ste. 302W
Milford, CT 06460
Phone: 203-878-1254
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Penner Law Firm
(Branford, CT Office)
1008 Main St., Branford, CT 06405
Phone: 203-878-1254
Toll Free: 888-256-7316
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