High-Fee Loans (HOEPA/Section 32 Mortgages)
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High-Rate, High-Fee Loans (HOEPA/Section
If you're refinancing your mortgage
or applying for a home equity installment loan, you
should know about the Home Ownership and Equity Protection
Act of 1994 (HOEPA). The law addresses certain deceptive
and unfair practices in home equity lending. It amends
the Truth in Lending Act (TILA) and establishes requirements
for certain loans with high rates and/or high fees.
The rules for these loans are contained in Section 32
of Regulation Z, which implements the TILA, so the loans
also are called "Section 32 Mortgages." Here's
what loans are covered, the law's disclosure requirements,
prohibited features, and actions you can take against
a lender who is violating the law. As of 2010, the
government has increased it's vigilance and is now
providing direct assistance to homeowners with
free money to pay your
A loan is covered by the law if it meets the
- for a first-lien loan, that is, the original mortgage
on the property, the annual percentage rate (APR)
exceeds by more than eight percentage points the rates
on Treasury securities of comparable maturity;
- for a second-lien loan, that is, a second mortgage,
the APR exceeds by more than 10 percentage points
the rates in Treasury securities of comparable maturity;
- the total fees and points payable by
the consumer at or before closing exceed
the larger of $510 or eight percent of
the total loan amount. (The $510 figure
is for 2005. This amount is adjusted annually
by the Federal Reserve Board, based on
changes in the Consumer Price Index.)
Credit insurance premiums for insurance
written in connection with the credit
transaction are counted as fees.
The rules primarily affect refinancing
and home equity installment loans that also meet the
definition of a high-rate or high-fee loan. The rules
do not cover loans to buy or build your home, reverse
mortgages or home equity lines of credit (similar to
revolving credit accounts).
If your loan meets the above tests, you must receive
several disclosures at least three business days before
the loan is finalized:
- The lender must give you a written notice stating
that the loan need not be completed, even though you've
signed the loan application and received the required
disclosures. You have three business days to decide
whether to sign the loan agreement after you receive
the special Section 32 disclosures.
- The notice must warn you that, because the lender
will have a mortgage on your home, you could lose
the residence and any money put into it, if you fail
to make payments.
- The lender must disclose the APR, the regular payment
amount (including any balloon payment where the law
permits balloon payments, discussed below), and the
loan amount (plus where the amount borrowed includes
credit insurance premiums, that fact must be stated).
For variable rate loans, the lender must disclose
that the rate and monthly payment may increase and
state the amount of the maximum monthly payment.
These disclosures are in addition
to the other TILA disclosures that you must receive
no later than the closing of the loan.
The following features are banned from high-rate, high-fee
- All balloon payments - where the regular payments
do not fully pay off the principal balance and a lump
sum payment of more than twice the amount of the regular
payments is required - for loans with less than five-year
terms. There is an exception for bridge loans of less
than one year used by consumers to buy or build a
home: In that situation, balloon payments are not
- Negative amortization, which involves smaller monthly
payments that do not fully pay off the loan and that
cause an increase in your total principal debt.
- Default interest rates higher than pre-default rates.
- Rebates of interest upon default calculated by any
method less favorable than the actuarial method.
- A repayment schedule that consolidates more than
two periodic payments that are to be paid in advance
from the proceeds of the loan.
- Most prepayment penalties, including refunds of
unearned interest calculated by any method less favorable
than the actuarial method. The exception is if:
- the lender verifies that your total monthly
debt (including the mortgage) is 50 percent or
less of your monthly gross income;
- you get the money to prepay the loan from a
source other than the lender or an affiliate lender;
- the lender exercises the penalty clause during
the first five years following execution of the
- A due-on-demand clause. The exceptions are if:
- there is fraud or material misrepresentation
by the consumer in connection with the loan;
- the consumer fails to meet the repayment terms
of the agreement; or
- there is any action by the consumer that adversely
affects the creditor's security.
Creditors also may not:
- make loans based on the collateral value of your
property without regard to your ability to repay the
loan. In addition, proceeds for home improvement loans
must be disbursed either directly to you, jointly
to you and the home improvement contractor or, in
some instances, to the escrow agent.
- refinance a HOEPA loan into another HOEPA loan within
the first 12 months of origination, unless the new
loan is in the borrower's best interest. The prohibition
also applies to assignees holding or servicing the
- wrongfully document a closed-end, high-cost loan
as an open-end loan. For example, a high-cost mortgage
may not be structured as a home equity line of credit
if there is no reasonable expectation that repeat
transactions will occur.
How Are Compliance
You may have the right to sue a lender for violations
of these new requirements. In a successful suit, you
may be able to recover statutory and actual damages,
court costs and attorney's fees. In addition, a violation
of the high-rate, high-fee requirements of the TILA
may enable you to rescind (or cancel) the loan for up
to three years.