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Home Equity Loans - Section 32 Mortgages
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." 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:
- The annual percentage rate (APR) exceeds by more than 10
percentage points the rates on Treasury securities of comparable
maturity; (or)
- The total fees and points payable by the consumer at or before
closing exceed the larger of $451 or 8 percent of the total loan
amount. (The $451 figure is for 2000. This amount is adjusted
annually by the Federal Reserve Board, based on changes in the
Consumer Price Index.) 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
purchase or initially construct 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 and the regular payment amount
(including any balloon payment where the law permits balloon
payments, discussed below) for high-rate, high-fee loans. 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 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% or less
of your monthly 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.
Creditors also are prohibited from engaging in a pattern or
practice of lending 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.
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 new 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 FTC publishes a series of credit and home-related
publications. For a free copy of Best Sellers, a complete list
of FTC publications, contact: Consumer Response Center, Federal
Trade Commission, Washington, DC 20580; toll-free:
1-877-FTC-HELP (382-4357). TDD: 202-326-2502. You also can visit
us at www.ftc.gov.
This article is public domain.
About the author:
Read more articles like this at Home Equity
Credit Line... articles and resources to help you get
the best home equity line of credit or loan, and avoid mistakes
and scams that could cost you your home.
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