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)

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

•	 the total fees and points payable by the consumer at or before closing exceed the larger of

$592 or eight percent of the total loan amount. (The $592 figure is for 2011. 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).

I
Facts for Consumers

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 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 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;
Facts for Consumers

{ 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.

How Are Compliance Violations Handled?

You may have the right to sue a lender 

for violations of these 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 

ftc.gov or call toll-free, 1-877-FTC-HELP

(1-877-382-4357); TTY: 1-866-653-4261.

The FTC enters consumer complaints into 

the Consumer Sentinel Network, a secure

online database and investigative tool used by 

hundreds of civil and criminal law enforcement 

agencies in the U.S. and abroad.
Facts for Consumers

1-877-FTC-HELP FOR THE CONSUMER

FEDERAL TRADE COMMISSION ftc.gov

February 2011

Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education

The Federal Trade Commission (FTC) is the nation’s consumer protection agency. 

Here are some tips from the FTC to help you be a more savvy consumer.

1.	 Know who you’re dealing with. Do

business only with companies that clearly 

provide their name, street address, and 

phone number.

2. Protect your personal information. Share 

credit card or other personal information 

only when buying from a company you 

know and trust. 

3. Take your time. Resist the urge to “act 

now.” Most any offer that’s good today 

will be good tomorrow, too. 

4.	 Rate the risks. Every potentially highprofit investment is a high-risk investment.

That means you could lose your 

investment — all of it.

5. Read the small print. Get all promises 

in writing and read all paperwork before 

making any payments or signing any 

contracts. Pay special attention to the 

small print. 

6.	 “Free” means free. Throw out any offer

that says you have to pay to get a gift or 

a “free” gift. If something is free or a 

gift, you don’t have to pay for it. Period. 

7.	 Report fraud. If you think you’ve been a

victim of fraud, report it. It’s one way to 

get even with a scam artist who cheated 

you. By reporting your complaint to 

1-877-FTC-HELP or ftc.gov, you are 

providing important information to help 

law enforcement officials track down 

scam artists and stop them!