FTC FACTS for Consumers

FOR THE CONSUMER 1-877-FTC-HELP

ftc.gov FEDERAL TRADE COMMISSION

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;

• 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
Facts for Consumers 

• the total fees and points payable by 

the consumer at or before closing 

exceed the larger of $561 or eight 

percent of the total loan amount. (The 

$561 figure is for 2008. 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 
Facts for Consumers

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 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.
Facts for Consumers

1-877-FTC-HELP FOR THE CONSUMER

FEDERAL TRADE COMMISSION ftc.gov

February 2008

Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education

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-FTC-HELP 

(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.