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The Disappearance of HOEPA Loans

posted by Adam Levitin

While I'm on the subject of dead markets, what about HOEPA loans? HOEPA loans are super-high-cost loans that qualify for special consumer protections under the Home Owners Equity Protection Act of 1994. (Yes, that's the one that directed that the Fed "shall" implement a rule on abusive lending, which the Fed understood to be discretionary until 2008.) 

HMDA data has previously been a bit of a pain to manipulate to get summary statistics--big data sets and annoying variable labels.  No longer. The CFPB has an amazing on-line HMDA data tool that is a lot of fun to explore. The CFPB's created the Rolls-Royce LoPucki-BRD of HMDA data.  It's a real public service. My only complaint is that the CFPB only has data going back to 2007. Hopefully the Bureau will add in 2005-2006, at least (there was a reporting change in 2004). The Urban Institute also has a nice HMDA data page, but it's really more for power users. 

OK. So what's gone on with HOEPA loans? HOEPA status was always a kiss of death, but in 2005, there were 35,980 HOEPA loans made. In 2013 (still under the same definitions), there were just 1,873. That's a 95% decline in HOEPA lending. Now it might well be that lenders are making lots of loans just under the HOEPA reporting thresholds. But there's little reason to think that they suddenly started doing that in 2013--that trick's been around for a while. Instead, what we're seeing is that high-cost mortgage lending has simply disappeared in the United States, much more so than lending has contracted in general.


The financial industry representatives attending the ULC HFPA Drafting Committee meetings love to hold HOEPA up as an example of how you kill mortgage lending if you remove holder-in-due-course protections for loan buyers. At the moment, at least, we have a partial roll-back of HDC protections in the draft HFPA. The bankers have been howling about that, and assert that the dry-up in HOEPA loans is a predictor that the HFPA will dry up virtually all mortgage lending if the states enact it.

Tom, I'm not sure that I follow. HOEPA, including the assignee liability provision (15 USC 1641(d)) was enacted in 1994 (I've corrected the blog post to reflect that). The assignee liability provision is self-executing; it is not dependent upon a rule-making. Thus, HOEPA loans have had the threat of assigning liability hanging over then since 1994, but they certainly didn't disappear the way they have the last few years. So what's the causal claim the bankers are making? And are they really urging the return of HOEPA loans?

(Also, it's not clear to me that HOEPA entirely overrode HDC doctrine; they don't perfectly overlap.)

The bankers have not been at all articulate on this issue. When we have argued for the HDC roll-back, they have pointed to the drying up of HOEPA loans, and also the action of one state—perhaps Georgia— where a heavy predatory lending law was enacted around 2005 or so creating broad assignee liability. They assert that that state statute was revoked because the mortgage industry was refusing to do any mortgage lending in that state with that law in place. They have likewise argued that, while HOEPA did not dry up mortgage lending entirely, it did drive lenders away from making those kinds of loans and thus and HDC roll back would be likely to reduce or dry up mortgage lending across the board.

Your figures are interesting and will be very helpful at the next ULC committee meeting at the end of February in resisting the efforts that surely will be made to eliminate the HDC roll back from the draft act. I was not previously aware of the volume of HOEPA lending in 2005.

The bankers, as well as the securitization industry representatives, claim that the draft act, by its partial roll-back of HDC protection, will bring too much more uncertainty to the collectability of residential mortgages and thus will drive private investment capital to other markets. I have argued that the residential real estate market is so large, and available investment money is so vast, that the investment community will find a way to make money off real estate mortgages one way or the other. Now, however, when I see your other article about how slow the RBMS market is to recover, I wonder what is going on. I presume that private money just cannot compete with the GSE pricing model. Is that what is keeping the RBMS market from re-developing?

Note that the data only captures HMDA reportable banks (albeit, the majority of banks are HMDA reportable). I would venture to guess that many HOEPA loans are second mortgage or mobile home loans originated in rural/undeserved areas by non-HMDA banks.

Yes, very good point. Not all entities are subject to HMDA reporting. So the numbers might be a bit larger, but I wouldn't think by much.

Remember, however, that the HMDA-covered banks are required to report their loan purchases for HMDA, however, and virtually all financing today goes through a HMDA-covered bank intermediary at some point, even if the financing is ultimately Fannie/Freddie. Mortgage banks have largely disappeared (along with large scale warehouse lending and ABCP facilities). I can't immediately think of a large non-bank mortgage lender still in business.

fwiw, the HMDA data also shows that 2d mortgage lending has virtually disappeared since a 2006 peak (no surprise). I haven't looked at manufactured housing lending levels.

HOEPA loans were at their peak from 2003 to 2009. Also, HMDA data would not have the entire and true reporatage of HOEPA loans, for most of these loans were never characterized as a high cost loans or those falling under HOEPA category. HOEPA loans discovery was and is done more by recomputing and reallocation of numbers presented in the Closing Statements. HMDA might not be an accurate data. I have personally seen so many HOEPA loans here in boroughs of New York city, so it is not necessarily confined to rural areas. Also there is a huge new HOEPA loans market coming up, with the real properties turning into new currency and mortgage brokers preying on minorities to get them new loans from private lenders and non reporting banks.

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