A High-Cost Mortgage Disclosure is a critical consumer protection required under the Home Ownership and Equity Protection Act (HOEPA). It ensures borrowers receive clear, upfront information when their mortgage loan involves unusually high interest rates, fees, or other costly terms compared to typical market rates. Lenders must provide this written notice at least three business days before closing, giving borrowers time to reconsider or seek alternatives.
The disclosure acts as a mandatory warning label, highlighting that the loan is expensive and carries increased risks, including the potential loss of the home if payments aren’t met. This transparency aims to prevent borrowers from unknowingly entering into predatory or unaffordable loans.
To determine if a loan is “high-cost,” the Consumer Financial Protection Bureau (CFPB) uses three primary tests based on comparisons to the Average Prime Offer Rate (APOR):
- APR Test: The loan’s Annual Percentage Rate exceeds the APOR by more than 6.5 percentage points for first-lien mortgages.
- Points and Fees Test: For loans of $26,092 or more (adjusted annually), total points and fees exceed 5% of the loan amount.
- Prepayment Penalty Test: The loan includes a prepayment penalty lasting more than 36 months or costing more than 2% of the prepaid amount.
If a mortgage meets any one of these criteria, the lender is legally obligated to provide the High-Cost Mortgage Disclosure and comply with additional safeguards.
These safeguards prohibit lenders from including certain risky features in high-cost loans. For example, balloon payments, negative amortization, financing points and fees into the loan, and excessive prepayment penalties are restricted. Additionally, before closing, borrowers must complete counseling with a HUD-approved housing counselor to evaluate whether the loan terms are manageable and appropriate.
Receiving this disclosure does not mean the loan is illegal—it is intended to protect borrowers by ensuring they are fully informed of the higher costs and risks. Borrowers have a minimum three-day “cooling-off” period after receiving the disclosure to review the terms, shop around for better offers, or cancel without penalty.
If you receive a High-Cost Mortgage Disclosure, it’s wise to carefully review the information, ask your lender for clarification on why your loan triggered the disclosure, and consult with a housing counselor or financial advisor. You can find HUD-approved housing counselors through the Consumer Financial Protection Bureau’s tool here: https://www.consumerfinance.gov/find-a-housing-counselor/.
For more details on related mortgage protections, see our articles on Predatory Lending and Mortgage APR Explained. Understanding these topics can help you make informed decisions about your home financing.
References:
- Consumer Financial Protection Bureau, “Home Ownership and Equity Protection Act (HOEPA),” https://www.consumerfinance.gov/rules-policy/regulations/1026/32/
- Consumer Financial Protection Bureau, Find a Housing Counselor, https://www.consumerfinance.gov/find-a-housing-counselor/
- Investopedia, “Home Ownership and Equity Protection Act (HOEPA),” https://www.investopedia.com/terms/h/hoepa.asp
- U.S. Department of Housing and Urban Development, Housing Counseling, https://www.hud.gov/program_offices/housing/sfh/hcc
