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Home Equity Loans - Section 32 Mortgages

Federal Trade Commission

If 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." 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:

- 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 high-fee 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 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 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.

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% 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

attorney's 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-FTC-HELP (382-4357). TDD: 202-326-2502. You also can visit

us at www.ftc.gov.

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