14.4 High-Cost Mortgages

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14.4 High-Cost Mortgages

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14.4      High-Cost Mortgages. The Act prescribes standards for points and fees related to (i) high-cost mortgages, (ii) open-end consumer credit plans; and (iii) bona fide discount points and prepayment plans.

                        14.4.1.    "High-cost mortgage" Definition Revised.  The Act lowers the Home Ownership and Equity Protection Act trigger for high-cost mortgages in TILA. A first mortgage is a high-cost mortgage if the APR exceeds the average prime offer rate by more than 6.5%, which will be published by the Fed and updated weekly (however, if the transaction is for personal property and worth less than $50,000, the APR must exceed the prime offer rate by 8.5% or more). [§1431]  A subordinate or junior mortgage with an APR that exceeds the average prime rate by more than 8.5% will also be considered a high-cost mortgage. High-cost mortgages also include mortgages in which the points and fees are greater than 5% for transactions of more than $20,000.  For transactions less than $20,000, the threshold is the lesser of 8% of the total transaction or $1,000. Mortgages that allow the creditor to charge or collect prepayment fees for more than 36 months after the transaction closing or where such fees or penalties exceed 2% of the amount prepaid are also considered high-cost.

                        14.4.2.    Balloon Payments. The Act prohibits balloon payments for high-cost mortgages. [§1432(b)]

                        14.4.3.    Additional Requirements for High-Cost Mortgages. Additional requirements for high-cost mortgages include:

  • prohibiting creditors from  recommending default on an existing debt prior to and in connection with the closing of a high-cost mortgage that refinances such debt;
  • prohibiting late payment fees in connection with a high-cost mortgage with certain exceptions;
  • prohibiting the acceleration of debt on a high-cost mortgage with certain exceptions;
  • prohibiting financing of either a prepayment fee or penalty payable by the consumer if the creditor is the noteholder of the note being refinanced in connection with any high-cost mortgage; and 
  • prohibiting the charging of any fee to modify, renew, extend or amend a high-cost mortgage and fees for payoff statements, except for a processing fee. [§1433]

14.4.4.              Pre-loan Counseling. Borrowers must receive pre-loan counseling before they receive a high-cost mortgage by a HUD-certified counselor or other approved authority. The counselor may not be employed or affiliated with the creditor of the mortgage. The counselor must verify that the consumer has received all information required by the Act. The Fed may prescribe regulations regarding pre-loan counseling.

                        14.4.5.    Corrections and Unintentional Violations. When acting in good-faith, a creditor may make timely corrections and avoid liability for an unintentional violation of the requirements  for high-cost mortgages.