[NMLS SAFE] 8, HOEPA High-Cost Loans and MLO Compensation

Lesson eight of the free Quibank NMLS SAFE course: HOEPA high-cost loans, and the rules about how you, the originator, get paid. Two topics the exam treats as pure memorization — so let's memorize exactly the right things. HOEPA is the high-cost mortgage law. A loan becomes high-cost by crossing any one of three triggers: the APR spread over the benchmark, the points and fees threshold, or carrying a prepayment penalty beyond the allowed limits.

One trigger is enough. And once a loan is high-cost, a package of consequences attaches. The borrower must receive homeownership counseling from a HUD-approved counselor before the loan is made. Prepayment penalties are banned outright.

So are balloon payments, with narrow exceptions, and negative amortization. Notice the shape: counseling required, risky features banned. Exam version. A loan is classified as high-cost under HOEPA — which requirement applies?

Pre-loan counseling from a HUD-approved counselor, and no prepayment penalties. The wrong answers will offer second appraisals with wrong conditions, escrow rules with prepayment penalties still allowed, or selling the loan to an agency — none of that is the HOEPA package. Now compensation. Regulation Z's rule is one sentence: an originator may not be paid based on any term of the transaction, or any proxy for a term.

The interest rate is a term. A prepayment penalty is a term. Loan-to-value ratio is a term. What is allowed?

A fixed percentage of the loan amount — loan size is expressly a permissible basis — and that percentage may carry a minimum and maximum dollar amount. So: which pay basis is permitted? The fixed percentage of loan amount, applied consistently. Higher commission for higher rate, extra pay for a prepayment penalty, a bonus keyed to loan-to-value — each of those is compensation based on a term, and each is the wrong answer for the same reason.

One more compensation rule, and it is absolute: dual compensation. If the consumer pays the originator directly — say, an origination fee out of pocket at closing — then no one else, not the creditor, not anyone, may also compensate that originator on the same transaction. One transaction, one payer. Disclosure does not fix it, consent does not fix it, reasonableness does not fix it.

Try it. A borrower pays the broker's fee directly, and the creditor offers the same broker an additional commission on the same loan. Prohibited — full stop. Any answer with an if — if disclosed, if reasonable, if the borrower consents — is wrong.

The ban has no ifs. Recap. HOEPA: three triggers — APR spread, points and fees, prepayment penalty — any one makes the loan high-cost; then counseling is mandatory and prepayment penalties, balloons, and negative amortization are banned. Compensation: never by a term or its proxy; a fixed percentage of loan amount with a floor and cap is fine.

And if the consumer pays you directly, nobody else can. Next lesson: advertising — the trigger terms, and the bait-and-switch rules. Practice today's rules free at quibank.com/mlo. See you in lesson nine.