OriginatorExam

Guide

Higher-priced vs high-cost mortgage tests

HPML turns on one APR test at 1.5, 2.5 or 3.5 points over APOR. HOEPA has three tests: APR at 6.5 or 8.5, points and fees, and the prepayment penalty terms.

Published 2026-10-13

Two sections of Regulation Z (12 CFR Part 1026) run two different tests, and a single loan can fail both, one or neither. A higher-priced mortgage loan (HPML) is decided by one rate test in s. 1026.35(a)(1). A high-cost mortgage under the Home Ownership and Equity Protection Act of 1994 (HOEPA) is decided by three tests in s. 1026.32(a)(1), any one of which is enough. The HPML label brings escrow and appraisal duties. The high-cost label brings a counseling requirement and a list of forbidden loan terms.

Side by side

Higher-priced mortgage loanHigh-cost mortgage
Sections. 1026.35(a)(1)s. 1026.32(a)(1)
Rate test, first lienAPR is 1.5 points or more over APOR (2.5 points or more where the principal obligation exceeds the Freddie Mac purchase limit)APR exceeds APOR by more than 6.5 points, or by more than 8.5 where the dwelling is personal property and the loan is under $50,000
Rate test, subordinate lien3.5 points or moremore than 8.5 points
Points-and-fees testnone5% of total loan amount at $27,592 or more in 2026; the lesser of 8% or $1,380 below that
Prepayment penalty testnonepenalty possible beyond 36 months, or exceeding 2% of the amount prepaid
Number of tests to failthe oneany one of three
Main dutiesescrow for five years, written appraisal with an interior visit, sometimes a second appraisalpre-loan counseling, prohibited terms, extra disclosures, repayment ability

APOR is the average prime offer rate: an annual percentage rate (APR) derived from pricing terms currently offered by a representative sample of creditors for low-risk transactions, defined at s. 1026.35(a)(2) and republished at least weekly by the Consumer Financial Protection Bureau (CFPB).

The one test that makes a loan higher-priced

Under s. 1026.35(a)(1) an HPML is a closed-end consumer credit transaction secured by the consumer’s principal dwelling whose APR exceeds APOR for a comparable transaction, as of the date the interest rate is set, by:

  • 1.5 percentage points or more on a first lien whose principal obligation at consummation does not exceed the Freddie Mac purchase limit in effect on the rate-set date.
  • 2.5 percentage points or more on a first lien above that limit, which is the jumbo case.
  • 3.5 percentage points or more on a subordinate lien.

Points and fees play no part in this test. One dollar figure does: which of the first two spreads applies turns on whether the principal obligation at consummation exceeds the maximum principal obligation eligible for purchase by Freddie Mac on the rate-set date, under s. 1026.35(a)(1)(i) and (ii). The CFPB’s HPML appraisal rule guide puts the coverage the same way on page 10: the rule reaches higher-priced first-lien or subordinate-lien closed-end loans on a principal dwelling that no exemption covers.

The high-cost coverage tests

Section 1026.32(a)(1) reaches a consumer credit transaction secured by the consumer’s principal dwelling and asks three questions. The CFPB’s HOEPA small entity compliance guide lists them on page 16 as the APR test, the points-and-fees test and the prepayment penalty test.

The APR test compares the transaction’s APR against APOR for a comparable transaction: more than 6.5 percentage points over on a first lien, more than 8.5 on a first lien where the dwelling is personal property and the loan amount is under $50,000, and more than 8.5 on a subordinate lien.

The points-and-fees test compares total points and fees, as defined at s. 1026.32(b)(1) and (2), against a percentage or a dollar figure that moves every January 1 with the Consumer Price Index. The prepayment penalty test asks whether the contract lets the creditor charge a prepayment penalty more than 36 months after consummation or account opening, or penalties that can exceed 2 percent of the amount prepaid in total.

Four transaction types are outside s. 1026.32 altogether under s. 1026.32(a)(2): a reverse mortgage subject to s. 1026.33, a loan financing the initial construction of a dwelling, a transaction where a Housing Finance Agency is the creditor, and a loan under the United States Department of Agriculture’s Rural Development Section 502 Direct Loan Program.

The 2026 dollar figures, and why the year is part of the answer

For 2026 the HOEPA total loan amount figure is $27,592 and the points-and-fees dollar trigger is $1,380, both set by the CFPB notice at 90 FR of December 15, 2025 and effective January 1, 2026. For 2025 the same two figures were $26,968 and $1,348. The HPML appraisal exemption sits at $34,200 for 2026, up from $33,500 in 2025. The year-by-year table carries the rest of the 2025 and 2026 figures side by side.

What each label costs the lender

An HPML secured by a first lien on a principal dwelling needs an escrow account for property taxes and mortgage-related insurance before consummation under s. 1026.35(b)(1). The CFPB’s HPML escrow rule compliance guide states the duration on page 7: the account runs at least five years regardless of loan-to-value ratio, and can end earlier only if the debt is terminated. Section 1026.35(b)(3)(i) allows cancellation on a consumer request received no earlier than five years after consummation, and s. 1026.35(b)(2) exempts a cooperative, initial construction, a bridge loan of 12 months or less, a reverse mortgage and a PACE transaction.

Section 1026.35(c) adds the appraisal rules: a written appraisal before consummation by a certified or licensed appraiser who physically visits the interior of the property, a free copy to the consumer no later than three business days before consummation, and a second appraisal where the seller acquired the property 90 or fewer days before the consumer’s agreement and the consumer’s price exceeds the seller’s acquisition price by more than 10 percent, or acquired it 91 to 180 days before and the consumer’s price exceeds the seller’s acquisition price by more than 20 percent. The two appraisals must come from different appraisers and the consumer may be charged for only one of them.

A high-cost mortgage carries heavier terms. Section 1026.34(a)(5) bars a creditor from extending one without written certification that the consumer received counseling on the advisability of the mortgage from a counselor approved by the Secretary of the U.S. Department of Housing and Urban Development, or by a state housing finance authority where the Secretary permits it. The counselor may not be employed by or affiliated with the creditor, and the creditor may not steer the consumer to a particular counselor.

Section 1026.32(d) then forbids a list of terms outright: a balloon payment more than twice a regular periodic payment (with narrow exceptions for seasonal income, a bridge loan of 12 months or less and certain balloon-payment qualified mortgages), negative amortization, more than two periodic payments consolidated and paid in advance from the proceeds, an interest rate increase after default, a rebate method less favorable than the actuarial method, any prepayment penalty, and most acceleration on demand. Section 1026.34(b) bars structuring a transaction to evade the high-cost rules, including by splitting a loan into parts.

The order to run them in

Run the exemption list first, then the rate test against APOR, then the points-and-fees arithmetic, then the prepayment penalty terms. A loan can clear HOEPA and still be an HPML, because 1.5 points over APOR is a long way below 6.5. Read the other way, a closed-end first-lien loan that fails the HOEPA APR test is over APOR by more than 6.5 points, which is above the 1.5 and 2.5 HPML spreads, so it clears the HPML rate test too, and most such loans carry the s. 1026.35(b) duties as well.

Section 1026.35(a)(1) runs one test, on the rate. Section 1026.32(a)(1) looks at the rate, the fees and the prepayment terms, and takes any one of the three. The 2026 dollar figures sit under the second of those, and they change every January 1.

Sources