Beware Of High Fee Mortgage Refinancing Rates


If you are planning to refinance your home mortgage or are applying for a equity line of credit from your home, you should be aware about the Home Ownership and Equity Protection Act of 1994 (HOEPA). The law addresses certain unfair and deceptive practices used in home equity lending. It amends the Truth in Lending Act (TILA) and establishes certain requirements for loans with high fees and/or high rates. The rules for these loans are contained in Section Thirty-Two of Regulation Z, which implements the TILA, so the loans also are called "Section Thirty-Two Mortgages". Below are the loans that are covered along with the law's prohibited features, disclosure requirements, and actions you can take against a lender who violated the law.

If a loans meets the following tests, it is covered under the law:

1) For a first-lien loan otherwise referred to as the original mortgage on the property - the Annual Percentage Rate (APR) exceeds by more than 8 percentage points compared against the rates on Treasury securities of comparable maturity;

2) For a second-lien loan otherwise referred to as a 2nd mortgage - the APR (Annual Percentage Rate) exceeds by more than 10 percentage points compared to the rates in Treasury securities of comparable maturity; or the total points and fees payable by the borrower at or before closing exceed the larger of $561 or 8% of the total loan amount. (The $561 figure is for 2008. Th Federal Reserve Board annually adjust this amount, based on changes in the Consumer Price Index.) Credit insurance premiums for insurance written in connection with the credit transaction are counted as fees.

These rules mostly affect home equity installment loans and refinancing that also meet the definition of a high-fee or high-rate loan. These rules don't cover loans to build or buy your home, home equity lines of credit (similar to revolving credit accounts), or reverse mortgages.

You must be issued several disclosures at least 3 business days before the loan is finalized, if your loan meets the above tests:

1) You must receive a notice in writing by the lender which states that the loan need not be completed, even though you have received the required disclosures and signed the application for the loan. You have 3 business days (not including weekends) to decide whether to sign the loan agreement after you receive the special Section thirty two disclosures.

2) The notice must warn the borrower that the lender will have a mortgage on your home and if you fail to make the loan payments, you could lose the residence and any money you have put into it.

3) The lender or financial institution must also disclose to the borrower the Annual Percentage Rate (APR), the normal payment amount (this includes any balloon payment where the law permits balloon payments, that is 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 monthly payment and rate may increase and state the maximum monthly payment amount.

These disclosures are in addition to the other TILA disclosures that you must receive no later than the closing date of the loan.

The following features are prohibited from high-fee, high-rates loans:

1) All balloon payments - where the normal payments do not pay off the principal balance in full and a lump sum payment of more than twice the amount of the normal payments is required - for loans with less than 5 yr. terms. There is an exception for bridge loans of less than 1 yr. used by borrowers to build or buy a home: In that particular situation, balloon payments are not prohibited.

2) Negative amortization - that involves smaller monthly payments which do not pay off the loan fully and that cause an increase in your total principal debt.

3) Default interest rates higher than pre-default interest rates.

4) Rebates of interest upon default calculated by any method less favorable than the actuarial method.

5) A repayment schedule that consolidates more than two periodic payments that are to be paid in advance from the proceeds of the loan.

6) Most prepayment penalties, including refunds of unearned interest calculated by any method less favorable than the actuarial method. The exception is if:

a) The lender verifies that your total monthly debt (which includes the mortgage) is fifty percent or less of your gross monthly income;

b) You get the money to prepay the loan from a source other than the lender or an affiliate lender; and

c) You lender exercises the penalty clause during the first 5 yrs. following execution of the mortgage.

7) A due-on-demand clause - The exceptions are if:

a) There is material misrepresentation or fraud by the borrower in connection with the loan;

b) The borrower fails to meet the terms of repayment in the agreement; or

c) There is any action by the borrower that negatively affects the creditor's security.

Creditors also may not:

1) Make a loan that is based on the collateral value of your home or property without regard to your ability to repay the loan. Furthermore, proceeds for home improvement loans must be disbursed either jointly to you and the home improvement contractor, directly to you, or in some circumstances, to the escrow agent.

2) Refinance a HOEPA loan into another HOEPA loan within the first twelve months of origination, unless the new loan is in the borrower's best interest. The prohibition also applies to assignees servicing or holding the loan.

3) Wrongfully document a high-cost, closed-end 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.

You may have the right to file a lawsuit against a lender for violations of these new requirements. In a successful lawsuit, you may be able to recover actual and statutory damages, attorney's fees and court costs. In addition, a violation of the high-fee, high-rate requirements of the TILA may enable you to cancel or rescind the loan for up to 3 years.