High-Cost Mortgage Rules Under HOEPA: Triggers and Remedies

The high-cost mortgage rules under HOEPA classify a home loan as “high-cost” when it crosses any one of three federal price thresholds, and that classification forces the lender to follow a stricter set of protections than apply to ordinary mortgages. The rules come from the Home Ownership and Equity Protection Act, an amendment to the Truth in Lending Act, and they cover purchase mortgages, refinances, home equity loans, and HELOCs secured by your principal dwelling. If your loan qualifies, you get mandatory counseling, a three-day cooling-off window, bans on features like balloon payments and negative amortization, and unusually strong remedies if the lender gets it wrong.

The Three Triggers That Make a Loan High-Cost

Only one trigger has to be hit. A loan can pass two tests and still be high-cost because it failed the third.

APR Above the Average Prime Offer Rate

The first test compares the loan’s annual percentage rate to the Average Prime Offer Rate, the rate well-qualified borrowers get on a similar loan. A first-lien mortgage on real property is high-cost if its APR exceeds the APOR by more than 6.5 percentage points. For a first lien on personal property such as a manufactured home where the loan is under $50,000, the spread is 8.5 percentage points. For any subordinate lien, the threshold is 8.5 percentage points above the APOR.¹

Points and Fees Above the 2026 Dollar Limits

The second test looks at total points and fees charged at or before closing. For 2026, if the loan amount is $27,592 or more, the loan is high-cost when points and fees exceed 5 percent of the total loan amount. If the loan is below $27,592, the trigger is the lesser of 8 percent of the loan amount or $1,380.² These dollar figures adjust every January based on the Consumer Price Index.

Prepayment Penalty Terms

The third test targets prepayment penalties. If the loan lets the lender charge a fee for early payoff more than 36 months after closing, or if the penalty can exceed 2 percent of the amount prepaid, the loan is automatically high-cost.³ There’s a catch that makes this trigger self-defeating for lenders: once a loan is classified as high-cost, prepayment penalties are banned outright.⁴

Loans HOEPA Does Not Cover

HOEPA only applies to loans secured by your principal dwelling. A mortgage on a vacation home or investment property never triggers these rules no matter how expensive it is. Beyond that, several specific loan types are exempt:

Reverse mortgages are excluded by the statutory definition.
Loans financing the initial construction of a new home are exempt. Renovation and remodeling loans are not. In a construction-to-permanent loan structured as two transactions, only the construction phase is exempt.
Loans originated and directly financed by a state or local Housing Finance Agency are exempt. Loans merely guaranteed or insured by such an agency are not.
USDA Section 502 Direct Loans, directly financed by Rural Development, are excluded.

The line between “directly financed” and “guaranteed” matters. If a government agency backs the loan but a private lender funds it, no HOEPA exemption applies.⁵

Disclosures and the Three-Day Waiting Period

Before a high-cost mortgage closes, the lender must give you a written disclosure carrying a specific warning: you are not required to complete the loan just because you received the disclosures or signed the application, and you could lose your home if you fail to meet the loan’s obligations. The disclosure has to state the APR, regular payment amounts, and whether the rate is variable. For variable-rate loans, it must show the maximum possible monthly payment. For a refinance, it must state the total amount borrowed.⁶

The lender must deliver those disclosures at least three business days before closing.⁴ If anything changes to make the initial disclosure inaccurate, new disclosures go out and the three-day clock restarts. One exception: if you initiate a change and the new terms lower your APR, the lender can close without waiting again. The waiting period gives you time to review, consult an advisor, or walk away.

Mandatory Pre-Loan Counseling

No lender can close a high-cost mortgage until you complete counseling with a HUD-approved counseling organization. The counselor must be independent of the lender, and the lender needs written certification from the counselor before final documents can be signed.⁷

The session covers the specific terms of the loan offered and your ability to handle the debt. The lender can pay the counseling fee, but cannot condition that payment on you actually closing. If you back out after counseling, the lender still has to cover the fee if it agreed to. You can also pay it yourself or finance it into the loan as a bona fide third-party charge.

Loan Terms the Lender Cannot Include

HOEPA bans several loan features outright. These prohibitions apply whether or not the borrower would have agreed to them.

Negative amortization is prohibited. The loan cannot be structured so scheduled payments fail to cover the interest due, allowing the balance to grow.³

Balloon payments are generally banned. Three narrow exceptions exist: loans with payment schedules adjusted for seasonal or irregular income, short-term bridge loans of 12 months or less for consumers buying a new home while selling an existing one, and certain loans from small creditors in rural or underserved areas that meet additional federal criteria.⁵

A lender cannot raise your interest rate because you missed a payment. Default-triggered rate increases are prohibited.

Acceleration clauses are restricted. The lender cannot demand full repayment of the balance before the term ends unless the borrower committed fraud or material misrepresentation, defaulted on payments, or took action (or failed to act) in a way that damaged the lender’s security interest in the property. That third exception is broader than physical damage: letting property insurance lapse or allowing a senior tax lien to accumulate could qualify.

Prepayment penalties are banned entirely on any high-cost mortgage.

Limits on Lender Conduct and Fees

The rules also constrain how a lender operates through the life of the loan.

Loan flipping is prohibited. Within one year of originating a high-cost mortgage, a lender cannot refinance the borrower into another high-cost mortgage unless the new loan genuinely benefits the borrower. The rule applies to assignees too, and lenders cannot evade it by routing refinances through affiliated or unaffiliated creditors.⁸

Late fees cannot exceed 4 percent of the past-due payment, and the lender can only charge one late fee per missed payment. Payoff statement fees are banned outright. Neither the lender nor a broker can recommend that you stop paying an existing loan to refinance into a high-cost mortgage.

When high-cost mortgage proceeds fund home improvement work, the lender cannot pay the contractor directly. Payment must go through an instrument made out to you, jointly to you and the contractor, or through a third-party escrow agent under a written agreement signed by all three parties before disbursement.

Ability-to-Repay Verification

Federal law requires a lender making any residential mortgage to make a reasonable, good-faith determination that you can afford the payments. High-cost mortgages carry extra exposure here because they never qualify as “Qualified Mortgages,” so the lender gets no legal safe harbor.

The lender must evaluate your credit history, current and expected income, existing debts, debt-to-income ratio, and employment status. Income and assets have to be verified using tax returns, W-2s, payroll records, bank statements, or IRS transcripts, not just accepted as stated on the application.⁹ The repayment calculation must assume the loan fully amortizes over its term with no balloon payment, using the fully indexed interest rate rather than a teaser rate.

What You Can Do If the Lender Violates HOEPA

HOEPA gives borrowers meaningful remedies, and they extend well past the closing table.

Damages

A lender that violates HOEPA’s requirements under Section 1639 is liable for actual damages, statutory damages, court costs, and reasonable attorney’s fees. Statutory damages in an individual lawsuit can reach the sum of all finance charges and fees the borrower paid, unless the lender proves the violation was immaterial.¹⁰

Extended Rescission

For most home loans, the right to cancel expires three days after closing. When a lender fails to deliver required HOEPA disclosures or the rescission notice, that right extends to three years after closing, or until the property is sold or transferred, whichever comes first.¹¹ Rescission unwinds the entire transaction. The lender loses its security interest in the home and returns any money you paid, and you return the loan proceeds.

Statute of Limitations and Foreclosure Defense

Lawsuits for HOEPA violations must generally be filed within three years of the violation, longer than the one-year window for other Truth in Lending Act claims. Even after that window closes, you can raise a HOEPA violation as a defense in a foreclosure action. If a lender forecloses on a high-cost mortgage that was originated in violation of HOEPA, you can assert the violation as a recoupment or set-off to reduce or eliminate the amount owed, regardless of the three-year limit.

Liability Follows the Loan

If your high-cost mortgage is sold, the new holder is subject to all claims and defenses you could have raised against the original lender. The assignee can escape this only by proving, by a preponderance of the evidence, that a reasonable person exercising ordinary due diligence could not have determined from the loan documents that the mortgage was high-cost.¹² Because HOEPA classification turns on straightforward math, that defense is hard to win, which is why investors avoid loans with HOEPA problems and originators have reason to get it right the first time.

1
Office of the Law Revision Counsel. 15 USC 1602 – Definitions and Rules of Construction
2
Federal Register. Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages)
3
eCFR. 12 CFR 1026.32 – Requirements for High-Cost Mortgages
4
Office of the Law Revision Counsel. 15 USC 1639 – Requirements for Certain Mortgages
5
Consumer Financial Protection Bureau. High-Cost Mortgage Rules Under HOEPA Small Entity Compliance Guide
6
eCFR. 12 CFR 1026.32 – Requirements for High-Cost Mortgages – Section: Disclosures
7
eCFR. 12 CFR 1026.34 – Prohibited Acts or Practices in Connection With High-Cost Mortgages – Section: Pre-Loan Counseling
8
eCFR. 12 CFR 1026.34 – Prohibited Acts or Practices in Connection With High-Cost Mortgages
9
Office of the Law Revision Counsel. 15 USC 1639c – Minimum Standards for Residential Mortgage Loans
10
Office of the Law Revision Counsel. 15 USC 1640 – Civil Liability
11
Consumer Financial Protection Bureau. 12 CFR 1026.23 – Right of Rescission
12
Office of the Law Revision Counsel. 15 USC 1641 – Liability of Assignees