HOEPA and hard money: why a 14% investor loan is not a “high-cost mortgage”
HOEPA’s rate, points-and-fees and prepayment-penalty triggers apply only to consumer-purpose loans secured by a principal dwelling, so a rental or flip loan at hard money pricing is never a federal high-cost mortgage. State usury caps and high-cost statutes are the limits that remain.
A hard money loan at 13% with three points would trip every HOEPA trigger if it were a consumer mortgage: the APR would exceed the average prime offer rate by more than 6.5 points on a first lien, and the points and fees would exceed the 5% threshold. The reason it is lawful is that § 1026.32 covers consumer credit secured by the borrower’s principal dwelling. A non-owner-occupied rental is neither your principal dwelling nor, under the Reg Z commentary, consumer credit. Both doors are closed, and no amount of pricing opens them.
Consequences of the exemption
None of the HOEPA protections attach to an investor loan: no requirement of pre-loan housing counseling, no three-business-day special disclosure, no ban on balloon payments under five years, no ban on prepayment penalties, no prohibition on default interest above the note rate, and no limit on financing points and fees into the loan. Late-fee caps, the ban on recommending default and the restrictions on modification fees also fall away. Business-purpose lenders price accordingly: default rates of 18% to 24% and late charges of 5% to 10% of the payment are common in hard money notes precisely because no federal rule forbids them.
What limits the price instead
- State usury law. Many states cap interest on loans secured by real property, with exemptions for licensed lenders, for loans above a dollar threshold or for entity borrowers — which is one reason lenders insist on an LLC borrower in some states. Our state pages list usury ceilings and the typical exemptions.
- State high-cost and predatory-lending statutes. A few states define “high-cost” by collateral rather than occupancy and can reach investor loans on one-to-four-unit property; confirm before assuming HOEPA’s exemption carries through.
- Unconscionability and penalty doctrine. Courts can refuse to enforce default interest or fees that operate as penalties rather than as compensation for actual loss, especially where the loan was already over-secured.
The loan that is still HOEPA
A high-rate second mortgage on your own home to fund rehab money is a consumer loan on a principal dwelling and subject to the full rule: the lender must give the HOEPA disclosure, verify your ability to repay, and you must receive counseling from a HUD-approved agency before closing. Lenders who route investor capital through an owner-occupied property at hard money pricing without those steps are making a high-cost mortgage unlawfully; the protections on the HOEPA overview apply to you in that scenario.
Questions that substitute for the statute
Ask what the total cost of the loan will be over the expected term with every fee included, what the default interest rate is and when it triggers, whether late charges compound, whether points are refundable if the loan does not fund, and whether a payoff within the first months carries a minimum-interest charge. Compare the answers against the guide to hard money rates, points and LTV; a loan whose all-in cost runs far past the state’s usury ceiling for your borrower type deserves a lawyer’s review before signing.
What to check
- Look up the state usury ceiling and the exemptions for licensed lenders or entity borrowers; that is the operative limit on a business-purpose rate.
- Read the default interest and late-fee clauses as if no federal cap existed, because none does — then negotiate a cure period before default interest starts.
- Confirm the state does not define high-cost loans by collateral rather than occupancy, which can pull investor loans back into a state HOEPA analogue.
- Never accept hard money pricing on a loan secured by your own home without the HOEPA disclosure and counseling — that loan is still covered.
Frequently asked questions
Is a 24% default interest rate on my flip loan legal?
Federal law does not cap it, because HOEPA and the QM rules do not cover business-purpose loans on non-owner-occupied property. State law may: some states cap default interest or treat large jumps as unenforceable penalties, and usury statutes sometimes apply to the default rate even when the note rate is exempt. Ask a local attorney before signing, and negotiate a notice-and-cure period.
Do I need HUD counseling before taking a high-rate hard money loan?
Not for a loan on a rental or flip; the HOEPA counseling requirement applies to consumer high-cost mortgages on a principal dwelling. If the lender secures the loan with your own home and the pricing crosses the HOEPA thresholds, counseling from a HUD-approved agency is mandatory and the lender must wait for your certificate before closing.
The rule in full: HOEPA and high-cost mortgage rules. The borrower profile: Real estate investors. Related guides: DSCR loans vs conventional for investment property: qualify on rent or on income · BRRRR: refinancing a hard money rehab into a conventional or DSCR loan · HUD-approved housing counselors: free help that servicers take seriously · Foreclosure rescue scams: the six patterns and the federal rule that bans upfront fees.
Other federal rules for real estate investors
TILA / Reg Z · RESPA · TRID disclosures · ECOA · Fair Housing Act · HMDA · SAFE Act / NMLS · ATR / QM · HPA / PMI · Servicing rules · FCRA · Flood insurance · MARS rule · SCRA · LO compensation
HOEPA for other borrowers
First-time buyers · Conventional borrowers · Veterans · Self-employed · Retirees · Bad credit · Foreign nationals · Physicians · Heroes · Rural buyers · Condo & second home · Refinancing