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Hope for the HOEPA? Dodd-Frank Allows Cures for Inadvertent HOEPA Loans
By Catherine Brennan

In the myriad of changes wrought under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) lays a brief provision that may provide comfort for mortgage loan originators that accidentally make high cost mortgage loans under the Home Ownership and Equity Protection Act (HOEPA). HOEPA applies to certain consumer mortgage loan transactions that run afoul of a rate threshold or a points and fees threshold. In 1994, Congress, in enacting HOEPA, identified certain loans with rates or fees so high as to warrant additional protections for consumers. As a result, most mortgage loan originators avoided originating loans that would be subject to HOEPA, and only originated HOEPA loans inadvertently or by mistake. Until Dodd-Frank, it appeared that a creditor could not cure a violation of HOEPA, resulting in strict penalties for the originator. An originator of an inadvertent HOEPA loan can face a lawsuit for actual damages, statutory damages, court costs, attorneys’ fees and liability for an amount equal to the sum of all finance charges and fees paid by the consumer. In other words, a creditor that accidentally made a HOEPA loan had to live with the harsh consequences of making such loan. Importantly, this liability for HOEPA violations runs to the assignee, making such loans all but unsalable.

Dodd-Frank, however, throws such creditors and their assignees a bone or sorts. Dodd-Frank includes cure provisions for mistakes related to high cost mortgage loans. Section 1433 of Title 14, the mortgage lending provisions of Dodd-Frank, provides that creditors or assignees will not be liable for HOEPA violations that are made in good faith if the creditor or assignee notifies the consumer of the error or the consumer notifies the creditor of the error and has yet to file a lawsuit, the creditor or assignee makes “appropriate restitution,” and the creditor or assignee makes any needed adjustments to the loan at the choice of the consumer within 30 days. The creditor or assignee has 60 days to cure after discovery or receipt of notification of an unintentional violation or a bona fide error so long as this occurs before an action is instituted. Dodd-Frank does not define “appropriate restitution,” and we assume that federal regulators will flesh out this requirement. However, Section 1433 makes clear the options for adjustments include doing what needs to be done to satisfy the requirements of HOEPA or changing the terms of the loan in a manner so that the loan is no longer a high-cost mortgage. In other words, the creditor or assignee can either comply with HOEPA, give the consumer all of the disclosures HOEPA requires and reform the loan so that it includes no provisions outlawed under HOEPA, or reduce the Annual Percentage Rate and refund any fees so that the loan no longer qualifies as a HOEPA loan.

The key to this cure is that Section 1433 gives the consumer the choice to elect either reformation of the loan to comply with HOEPA or refund of interest and fees to make the loan a non-HOEPA loan – and Dodd-Frank does not specify what happens if the consumer does not make this election within the 30-day or 60-day corrective period, despite the good faith efforts of the creditor or assignee to contact the consumer to get her to make a choice.

A creditor that determines that a loan inadvertently triggered HOEPA in a post-closing quality control audit is, then, left in a bit of a pickle – 30 days after loan closing does not amount to a great deal of time to audit the loan, determine the HOEPA compliance failure, contact the consumer, and correct the error. For creditors close to the line on either their rates or their points and fees in connection with the mortgages they originate that could be subject to HOEPA, it would make sense to obtain a disclosure from the borrower at closing that allows the borrower to elect one remedy over the other, in the event the post-closing audit reflects that the loan is an inadvertent HOEPA loan. Call it the HOEPA Correction Statement – whatever you call it, it would allow the creditor to be able to cure the violation without running into the 30-day time frame, and the assignee would thus be able to purchase the loan without worry regarding the extreme penalties for violations of HOEPA that follow the assignee. Nothing in Section 1433 necessarily precludes the originator from asking the consumer to make this election upfront. Given the limited timeframe for the post-closing cure, it seems reasonable to ask the borrower to contemplate this choice at a time when she is actually paying attention to what the mortgage loan originator has to say.

Dodd-Frank includes cure provisions for mistakes related to high-cost mortgage loans. Section 1433 gives the consumer the choice to elect either reformation of the loan to comply with HOEPA or refund of interest and fees to make the loan a non-HOEPA loan.

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Cathy can be reached at 410-865-5405 or by email at cbrennan@hudco.com.

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