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f youre 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 highfees. 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.

Heres what loans are covered, the laws

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 highfee 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 youve 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.

High-Rate,

High-Fee Loans

(Section 32 Mortgages)

Facts

for Consumers

May 2000

Federal Trade Commission Toll-free 1-877-FTC-HELP

 www.ftc.gov For the Consumer
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What Practices Are Prohibited?

The following features are banned from

high-rate, high-fee loans:

✦ All balloon-paymentswhere 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 predefault 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 attorneys 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-FTCHELP (382-4357). TDD: 202-326-2502.

You also can visit us at www.ftc.gov.