FTC FACTS for Consumers

FOR THE CONSUMER

www.ftc.gov
REAL ESTATE

High-Rate,
FEDERAL TRADE COMMISSION
1-877-FTC-HELP

High-Fee Loans
(HOEPA/Section 32 Mortgages)

I f 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;

 Facts for Consumers

• for a second-lien loan, that is, a second • The lender must disclose the APR, the
mortgage, the APR exceeds by more than regular payment amount (including any
10 percentage points the rates in Treasury balloon payment where the law permits
securities of comparable maturity; or balloon payments, discussed below), and
the loan amount (plus where the amount
• the total fees and points payable by the borrowed includes credit insurance premi-
consumer at or before closing exceed the ums, that fact must be stated). For variable
larger of $547 or eight percent of the total rate loans, the lender must disclose that the
loan amount. (The $547 figure is for 2007. rate and monthly payment may increase and
This amount is adjusted annually by the state the amount of the maximum monthly
Federal Reserve Board, based on changes payment.
in the Consumer Price Index.) Credit
insurance premiums for insurance written These disclosures are in addition to the other
in connection with the credit transaction are TILA disclosures that you must receive no later
counted as fees. than the closing of the loan.

The rules primarily affect refinancing and

home equity installment loans that also meet What Practices Are Prohibited?
the definition of a high-rate or high-fee loan.
The following features are banned from high-
The rules do not cover loans to buy or build
rate, high-fee loans:
your home, reverse mortgages or home equity
lines of credit (similar to revolving credit
• All balloon payments — where the regular
accounts).
payments do not fully pay off the principal
balance and a lump sum payment of more
than twice the amount of the regular pay-
What Disclosures Are Required? ments is required — for loans with less than
If your loan meets the above tests, you must five-year terms. There is an exception for
receive several disclosures at least three busi- bridge loans of less than one year used by
ness days before the loan is finalized: consumers to buy or build a home: In that
situation, balloon payments are not prohib-
• The lender must give you a written notice ited.
stating that the loan need not be completed,
even though you’ve signed the loan appli- • Negative amortization, which involves
cation and received the required disclo- smaller monthly payments that do not fully
sures. You have three business days to pay off the loan and that cause an increase
decide whether to sign the loan agreement in your total principal debt.
after you receive the special Section 32
disclosures. • Default interest rates higher than pre-
default rates.
• The notice must warn you that, because the
lender will have a mortgage on your home, • Rebates of interest upon default calculated
you could lose the residence and any by any method less favorable than the
money put into it, if you fail to make actuarial method.
payments.
 Facts for Consumers

• A repayment schedule that consolidates borrower’s best interest. The prohibition

more than two periodic payments that are also applies to assignees holding or servic-
to be paid in advance from the proceeds of ing the loan.
the loan.
• wrongfully document a closed-end, high-
• Most prepayment penalties, including cost loan as an open-end loan. For ex-
refunds of unearned interest calculated by ample, a high-cost mortgage may not be
any method less favorable than the actuarial structured as a home equity line of credit if
method. The exception is if: there is no reasonable expectation that
• the lender verifies that your total repeat transactions will occur.
monthly debt (including the mortgage)
is 50 percent or less of your monthly
gross income; How Are Compliance Violations
• you get the money to prepay the loan Handled?
from a source other than the lender or
You may have the right to sue a lender for
an affiliate lender; and
violations of these new requirements. In a
• the lender exercises the penalty clause successful suit, you may be able to recover
during the first five years following statutory and actual damages, court costs and
execution of the mortgage. attorney’s fees. In addition, a violation of the
high-rate, high-fee requirements of the TILA
• A due-on-demand clause. The exceptions may enable you to rescind (or cancel) the loan
are if: for up to three years.
• there is fraud or material misrepresenta-
tion by the consumer in connection with
the loan; Where to Go for More Information.
• the consumer fails to meet the repay- The FTC works for the consumer to prevent
ment terms of the agreement; or fraudulent, deceptive, and unfair business
• there is any action by the consumer that practices in the marketplace and to provide
adversely affects the creditor’s security. information to help consumers spot, stop, and
avoid them. To file a complaint or to get free
information on consumer issues, visit
Creditors also may not:
www.ftc.gov or call toll-free, 1-877-FTC-
HELP (1-877-382-4357); TTY: 1-866-653-
• make loans based on the collateral value of
4261. The FTC enters Internet, telemarketing,
your property without regard to your ability
identity theft, and other fraud-related com-
to repay the loan. In addition, proceeds for
plaints into Consumer Sentinel, a secure,
home improvement loans must be disbursed
online database available to hundreds of civil
either directly to you, jointly to you and the
and criminal law enforcement agencies in the
home improvement contractor or, in some
U.S. and abroad.
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
Facts for Consumers

FEDERAL TRADE C OMMISSION FOR THE C ONSUMER

1-877-FTC-HELP www.ftc.gov

Federal Trade Commission

Bureau of Consumer Protection
Office of Consumer and Business Education

January 2007