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High-Rate,

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

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 $547 or eight percent of the total

loan amount. (The $547 figure is for 2007.

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 highrate, 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 predefault rates.

• Rebates of interest upon default calculated

by any method less favorable than the

actuarial method.
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• 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, highcost 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.

Where to Go for More Information.

The 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

www.ftc.gov or call toll-free, 1-877-FTCHELP (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.
Federal Trade Commission

Bureau of Consumer Protection

Office of Consumer and Business Education

January 2007

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Facts for Consumers