The Home Ownership and Equity Protection Act (HOEPA)

Home Loan Articles >> The Home Ownership and Equity Protection Act (HOEPA)

If you’re refinancing your mortgage loan or applying for a home equity installment loan, you should know about the Home Ownership and Equity Protection Act of 1994 (HOEPA). The ruling addresses specific deceptive and unjust practices in home equity borrowing.

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."

What Loans are Covered?

A loan is covered by the law if it meets the following:

It is a first-lien loan (the original mortgage on the property) and the annual percentage rate (APR) exceeds by more than eight percentage points the rates on Treasury securities of similar maturity.

It is a second-lien loan (a second mortgage) and the APR exceeds by more than 10 percentage points the rates in Treasury securities of comparable maturity.

The total fees and points payable by the consumer at or before closing exceed the larger of $528.00 or eight percent of the total loan amount (the %528 figure is based on numbers from 2006).

Credit insurance premiums for insurance written in connection with the credit transaction are counted as fees. The rules generally 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 build or buy your home, reverse mortgages or home equity lines of credit (similar to revolving credit accounts).

What Disclosures are Required?

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/or money put into it, if you fail to make payments.

The lender must disclose the APR, the normal 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 on the day of the loan closing.

What Practices are Prohibited?

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 regular method.

You might have the right to sue a lender for violations of these new requirements. In a victorious 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.

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