Practices, mostly: loan flipping, packing in insurance the borrower didn't ask for, stacking fees into the note, targeting people by age or address. Those proved hard to pin down in a statute, so in 1994 Congress set price thresholds instead. A loan that crosses the rate ceiling or the fee ceiling is a HOEPA loan, also called a high cost mortgage.
Predatory lending is easier to recognize than to define, which is why the practices acquired names of their own.
Flipping is refinancing the same borrower again and again, with fees added each round. Packing is bundling in insurance products the borrower did not ask for, often single premium credit life or disability coverage paid up front. Stacking is rolling high origination charges into the note. Targeting is selecting borrowers by age or neighborhood rather than by credit.
Taken singly, several of these were legal. That was the difficulty. A Federal Reserve Bank of Atlanta survey of the field in 2000 concluded that the definition remained elusive precisely because each practice, on its own, might be defensible.
An older homeowner has substantial equity and a fixed income. A major repair is needed, for example fixing a roof. A lender offers a loan underwritten against the value of the house rather than the income available to service it. Borrowers reported not knowing what the monthly payment was, that it could rise, or in some cases that the loan was secured by the property at all. When the payments became unmanageable, a refinance followed, then another, and the fees consumed the equity. The pattern had a name too: equity stripping through loan flipping.
Two background conditions made it possible. Usury ceilings had been eliminated over the preceding decade, permitting high rates. And rising house prices had built up the equity that made the loans worth making.
The geography was the second finding. Many lenders had pulled back from low income and minority neighborhoods, and high cost lenders moved into the gap. Regulators called the pattern reverse redlining: predatory lending concentrated in the places conventional credit had left.
None of that is straightforward to put into a statute. So in September 1994 Congress passed the Home Ownership and Equity Protection Act and set two price thresholds instead.
A loan became a HOEPA loan, also called a high cost mortgage, when its annual percentage rate ran more than ten percentage points above a comparable maturity Treasury, or when total points and fees exceeded eight percent of the loan or $400, whichever was greater. Above that line the lender owed an additional three day waiting period on top of the existing Truth in Lending rescission period, for six days in total, and specific disclosures including the warning that the borrower could lose the home and any money put into it. Balloon payments and negative amortization were prohibited, prepayment penalties limited, and underwriting without regard to the borrower's ability to repay barred outright.
Coverage was narrow by design. Originally, HOEPA reached refinances and home improvement loans, consistent with the concern that motivated it, which was existing homeowners losing accumulated equity. Purchase mortgages sat outside it, as did reverse mortgages and home equity lines of credit.
The mortgage market changed quickly around the law. Practices HOEPA had targeted became more widespread over the following decade, and largely avoided its prohibitions because the loans priced below the threshold. Single premium credit insurance was a substantial up front cost that fell outside the APR calculation.
The Federal Reserve, which held HOEPA rulemaking authority, addressed that in December 2001 by including those premiums in the calculation. Lenders abandoned the product. The same rule cut the APR trigger from ten points to eight, the lowest the statute allowed, and expanded coverage very little.
The scale is the part worth sitting with. At its 2005 peak, HOEPA covered about 36,000 loans, under half of one percent of refinance and home improvement originations that year. Subprime lending was running at roughly one fifth of all new originations. There was no ready way to distinguish predatory lending from subprime lending, to identify predatory lenders, or to measure amounts. Lenders skated just below the thresholds.
Dodd‑Frank amended HOEPA and moved rulemaking to the newly created Consumer Financial Protection Bureau (CFPB), which issued a rule in January 2013 effective the following January.
Coverage widened to include purchase money mortgages and home equity lines of credit. The rate benchmark moved from Treasury yields to the average prime offer rate (APOR), with triggers of 6.5 percentage points for most first liens and 8.5 points for subordinate liens and for small first liens secured by personal property. The points and fees trigger fell from 8 percent to 5 percent for larger loans. A prepayment penalty became a trigger in its own right. Crossing any of them now also requires documented homeownership counseling before closing, and bars financing the points and fees into the loan.
Volumes have stayed low throughout. The qualified mortgage (QM) rule, issued alongside, caps points and fees at 3 percent, so mainstream production is managed to a stricter limit than HOEPA's high cost thresholds.
A lender pricing a small second mortgage can still land above the threshold, because the fixed costs of closing any loan take a bigger bite out of a small balance. And a loan sold to a borrower who did not understand its terms can price comfortably below. Several federal regulators made this point when they testified about predatory lending in 2000, and the OCC cautioned against treating subprime and predatory as the same thing.
What did last is the measurement. Lenders have flagged HOEPA status in HMDA since the 2004 data year, part of the same rulemaking cycle that adjusted the thresholds, because regulators wanted to know how much high cost lending was happening and where. Those thresholds are now visible in the public record, loan by loan, lender by lender, county by county.
That is the layer we work in. HMDAVision provides insights on the full HMDA record so a flag like this can be analyzed by lender, market, borrower, product, and year, rather than inferred from averages.
A note on terms. High cost and predatory are not synonyms, and this issue does not treat them as such. HOEPA defines a price threshold. Whether a loan above it was abusive, or a loan below it was, is a question the statute does not reach. The federal officials who testified in 2000 said so directly, and the OCC cautioned against equating subprime lending with predatory lending.
A note on the data. HMDA does not capture all HOEPA lending. Some high cost loans are made by institutions outside HMDA reporting, and some loans made by HMDA reporters are not reportable under Regulation C. The definition also changed materially in January 2014, so counts before and after that date are not measuring the same thing.
