It is no secret that the high cost home loan provisions of the Home Ownership and Equity Protection Act of 1994 (“HOEPA”) operate as a de facto federal usury limit. In large part, this is because HOEPA provides that purchasers of high cost home loans are subject to all claims and defenses that the consumer could assert against the original creditor under both federal and state law. Without a secondary market willing to assume assignee liability risk, high cost home loans have acquired such a toxic reputation that very few lenders choose to originate them and even fewer will finance or buy them. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) greatly expanded HOEPA’s reach by extending its coverage to purchase money mortgages and home equity lines of credit (“HELOCs”); lowering the existing cost thresholds; adding a new prepayment penalty threshold; and revising the APR, finance charge, and points and fees calculations. At the same time, Dodd-Frank targets makers and holders of non-plain vanilla mortgages (i.e., those that do not qualify as a qualified mortgage (“QM”) or qualified residential mortgage (“QRM”)) with enhanced monetary damages, defenses to foreclosure, and risk retention requirements. Those few lenders who might be able and willing to offer credit outside the plain vanilla confines of the QM/QRM will not have much pricing flexibility to meet their customers’ legitimate credit needs before running into pickle-flavored HOEPA.

The Bureau of Consumer Financial Protection (the “CFPB” or the “Bureau”) issued a proposed rule last week to implement Dodd-Frank’s HOEPA amendments (the “HOEPA Rule”). To its credit, the Bureau appears to recognize that HOEPA’s expanded scope is likely to have a substantially negative impact on consumer access to credit. The Bureau’s proposal accordingly attempts to soften some of the harsher – and likely unintended – impacts of the Dodd-Frank amendments. Most notably, to prevent too many loans from triggering the HOEPA rate threshold, the Bureau suggests using a new “transaction coverage rate” (or “TCR”) in the rate threshold instead of the APR, in light of the expanded scope of the finance charge and APR in its proposed rule to combine the TILA and RESPA origination disclosures (the “TILA/RESPA Rule”). Unfortunately, the HOEPA thresholds would remain overinclusive, even if the Bureau were to replace the APR with the TCR – particularly in light of the credit-constraining effects of the proposed QM and QRM rules.

If the Bureau is serious about preserving consumer access to credit, it should exercise its authority to make more significant adjustments to the HOEPA thresholds.