|
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.
What Loans Are Covered?
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 $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).
What Disclosures Are
Required?
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.
What Practices Are
Prohibited?
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.
-
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
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.
|
