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.
A loan is covered by the law if it meets the
following tests:
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; or
the total fees and points payable by the consumer at or before closing
exceed the larger of $499 or eight percent of the total loan amount.
(The $499 figure is for 2004. 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 loans:
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 prohibited.
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; and
• The lender exercises the penalty clause during the first
five years following execution of the mortgage.
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 loan.
The lender verifies that your total wrongfully
document a closed end, high-cost loan as an open-end loan. For ex-ample,
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 Violations Handled?
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.
Where to Go for More Information.
The Federal Trade Commission (FTC) works for the
consumer to prevent fraudulent, deceptive, and unfair business
practices in the marketplace and to provide information to help
consumers spot, stop, and avoid them. To file a complaint or to
get free information on consumer issues, visit the FTC
here or call toll-free, 1-877-FTC-HELP (1-877-382-4357);TTY: 1-866-653-4261.
The FTC enters Internet, telemarketing, identity theft, and other
fraud-related complaints into Consumer Sentinel, a secure, online
database available to hundreds of civil and criminal law enforcement
agencies in the U.S. and abroad.
