In 2010, and in response to the financial crisis that we now know as the Great Recession, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The law places strict regulations on lenders and banks in an effort to protect consumers and prevent another all-out economic recession. It was this act that outlined a set of rules around higher priced vs. high cost mortgage rates.

While regulations that apply to higher priced mortgages are much fewer than those that apply to high-cost mortgages it is important that private money lenders carefully follow the rules.

What loans are covered?

• Consumer credit transactions secured by the consumer’s principal dwelling.

What is a Higher Priced Mortgage?

• A higher-priced mortgage is secured by the consumer's principal dwelling with one major criterion.
• The annual percentage rate exceeds the average prime offer rate (APOR) by a given amount.
• Typically, for a 1st lien mortgage, a mortgage loan is considered "higher priced" if the APR (annual percentage rate) surpasses the APOR (average prime offer rate) by 1.5% or more.
• If the first lien is a jumbo loan and its APR exceeds the APOR by 2.5% or more percentage points and;
• For subordinate mortgages, the loan is "higher priced" if its APR exceeds the APOR by 3.5% or more.
  

What is a High-Cost Mortgage Loan?

• High-cost mortgages have three major criterions in its definition.
• A 1st lien mortgage that has an APR that is more than 6.5 percentage points higher than the average prime offer rate;
• The total lender/broker points and fees exceed 5 percent of the total loan amount.
• The loan has a prepayment penalty beyond 36 months from closing or the prepayment penalty exceeds 2 percent of the amount prepaid.

The requirements that apply to higher-priced mortgages are much fewer than those that apply to high-cost mortgages as the primary focus on three specific restrictions:

• They must verify the consumer’s ability to repay.
• No prepayment penalty is allowed.
• Taxes and insurance must be escrowed and paid along with the loan’s principal and interest.

High-cost mortgages must meet the same three requirements above that pertain to Higher-priced mortgages but in addition to these, the following conditions apply among others:

• No balloon payment is allowed ; (Exemptions apply for Small Creditors that operate in a Rural or underserved Area)
• The maximum allowed late fee is 4% of the past-due payment;
• Points and fees may not be financed;
• Lender cannot recommend default;
• Taxes and insurance must be escrowed and paid along with the loan’s principal and interest payment for at least 5 years;
• No loan modification or extension fees can be charged;
• No negative amortization is allowed
• The interest rate cannot increase after a default;
• Pre-loan counseling is required
• No financing of any type of insurance is allowed into the loan;
• Arbitration or nonjudicial settlements cannot be required as terms of the loan and;
• Loan provisions that bar a borrower from taking legal action against the lender is not allowed.
• An early HCM disclosure must be delivered to the borrower at least three business days prior to closing. This is the same disclosure already required in connection with HCM refinance loans;
• Prepayment penalties are prohibited;
• Demand or call features are prohibited;
• Pyramiding of late fees or charges is prohibited;
• There are restrictions on fees that may be charged for payoff statements;
• Generally, you cannot refinance a consumer’s HCM with you into another HCM with you within one year; and
• In connection with a home improvement loan, the contractor cannot be paid directly; you must fund with joint checks

Tips for Lending

When hard money lenders and their lawyers see the prohibitions that apply to high cost mortgages, many of them opt not to close any additional personal residence loans. If private lenders keep their residence loan terms below the regulated thresholds for high cost mortgages, though, then the loans will be considered as higher priced mortgages. Thus, lenders only have to comply with 3 regulations.

Here are some tips for private lenders offering hard money loans in Houston to safely originate personal residence loans:

• Keep the total fees and points at 5% or less
• Keep the spread between APR and APOR at 6.5% or less
• Don't put any prepayment penalty in the loan terms

Concerning APR and APOR, the lower the interest rate, the less of a spread there is between APR and APOR. Likewise, the further out you set the balloon date, the less of a spread there will be.

An easy way to double-check your compliance at keeping fees at 5% or less is to make sure that the adjusted origination fee on a Good Faith Estimate doesn't exceed 5% of the loan's gross amount.

High cost mortgage rules are plentiful, which is why it's sometimes better to adjust the loan terms to comply with higher priced mortgage regulations.

We Can Help With High Cost Mortgage Needs

Hard money loans in Houston can be complicated, but they don't have to be.

Whether your loan is a high cost mortgage or a higher priced loan, we can provide you with the help you need as long as the loans comply with state laws.

If we aren't able to assist you, we'll be happy to direct you to someone who can. Contact us for any questions or concerns. We are always here to help!