HOME OWNERSHIP EQUITY PROTECTION ACT (HOEPA)

PREDATORY LENDING

On the topic of consumer and lender beware, the subject of predatory lending cannot be overemphasized. There is a breed of financial predators in operation in every state who are nothing more than scam artists posing as legitimate lenders. While they lure victims with offers of easy access to money, very often theses predatory lenders use high-pressure tactics and charge exorbitant interest rates and fees to lure consumers into loans with unaffordable repayment terms. Homeowners have been tricked into taking loans that they cannot afford to repay and might risk losing their home through foreclosure.

Many states have enacted legislation to protect homeowners from these predatory practices and, at the Federal level, the Home Ownership Equity Protection Act, commonly referred to as HOEPA, under section 226.32 (also referred to as Section 32) of Regulation Z, otherwise known as the Truth in Lending Act. HOEPA was enacted to regulate high cost loans and applies to most home equity and refinance loans secured by the borrower’s primary residence. There are two main parts to HOEPA: 1) the Annual Percentage Rate (APR) and points and fees threshold that show when a specific high cost loan is subject to the law, and 2) certain prohibitions and restrictions that are placed on high cost loans covered by the law.

High Cost Loans:

High cost loans by definition must be first or second liens which are refinances or equity loans on the principal residence of the consumer. When the transaction is for a first position lien, the interest rate cannot exceed 6 percentage points above the yield on Treasury securities having comparable periods of maturity on the 15th day of the month immediately preceding the month in which the application for the extension of credit is received by the lender. In the instance of junior lien positions that interest rate margin is 8%. The total points and fees payable on the transaction cannot exceed the greater of 5 percent of the total loan amount, or $1,000, excluding not more than 2 bona fide discount points. Bona fide discount points are defined as discount points that are: A) knowingly paid by the borrower; B) paid for the express purpose of lowering the benchmark interest rate; C) in fact reducing the rate or time price differential applicable to the loan from an interest rate which does not exceed the benchmark rate; and D) recouped within the first four years of the scheduled loan repayments. Recoupment: For purposes of this section of the law, loan discount points shall be considered to be recouped within the first 4 years of the scheduled loan payments if the reduction in the interest rate that is achieved by the payment of the loan discount points reduces the interest charged on the scheduled payments such that the dollar amount of savings in payments made by the borrower over the first four years is equal to or exceeds the dollar amount of the discount points paid by the borrower. Common fees included as closing costs or points are:

A) Points, loan fees, origination fees

B) Appraisal Fees (conducted internally)

C) Credit life/disability premiums

D) Yield Spread Premiums or Service Release Premiums

E) Title Insurance, examination, abstract, etc. (if performed by an affiliate of the lender)

F) Document preparation fees

Lender Disclosures:

It should be remembered that high cost loans are not by their nature illegal. They do however carry with them the responsibility on the part of the lender to take certain actions and make certain disclosures to the borrower. When a loan is subject to HOEPA, the lender must disclose the following statements to the borrower:

A) “The interest rate on this loan is much higher than most people pay. This means that the chance that you will lose your home is much higher if you do not make all payments under the loan”

B) “You may be able to get a loan with a much lower interest rate. Before you sign any papers, you have the right to go see a housing or consumer credit counseling agency, as well as to consult with other lenders to find ways to get a cheaper loan”

C) “If you are taking out this loan to repay other loans, look to see how many months it will take to pay for this loan and what the total amount is that you will have to pay before this loan is repaid. Even though the total amount you will have to pay each month may be less than the total amount you are paying each month for those other loans, you may have to pay on this loan for many more months than those other loans which will cost you more money in the end.”

Prohibitions:

Prepayment Penalty Provisions:

A) A mortgage subject to HOEPA regulations may not contain terms under which a consumer must pay any prepayment penalty for any payment made after the end of the 24 month period beginning on the date the mortgage is consummated; B) nor may a mortgage subject to HOEPA contain terms under which a consumer must pay prepayment penalties for any prepayment at or before the end of the initial 24 month period if the creditor financed points or fees in connection with the consumer credit transaction is an amount equal to or greater than 3 percent of the total amount of credit extended in the transaction; C) nor may a mortgage subject to HOEPA contain terms whereby the total of lender prepaid points added to the prepayment penalty is equal to or greater than 3 percent of the amount of the credit extended in the transaction.

Balloon Payments:

HOEPA prohibits balloon payments on high cost mortgage loans within the first five years of the loan. Balloon payments can be structured after the initial five year term.

Negative Amortization:

Negative amortization occurs when the scheduled payments for principal and interest are inadequate to cover the full cost of principal and interest under the loan. Interest and principal payments are deferred and added to the principal balance of the loan thus creating negative amortization wherein the principal balance of the loan increases. Negative amortization is prohibited on HOEPA loans.

Additional Requirements for High Cost Loans:

Qualification and Verification:

The lender must ascertain that the resident obligor (the obligor who will be responsible for the loan and whose principal residence is used as security for the loan) qualifies to make the monthly payments under the debt obligation. In so doing the lender must independently verify the source and amount of employment income of the resident obligor and calculate that the amount of income verified is sufficient to support the payments under the financing transaction.

Single Premium Credit Insurance:

A mortgage loan subject to HOEPA may not contain terms that require or allow in conjunction with such mortgage: A) the advance collection of a premium on a single premium basis for any credit life, credit disability, credit unemployment or credit property insurance and any analogous product; or B) the advance collection of a fee for any debt collection or suspension agreement or contract

Financed Points and Fees:

In a mortgage transaction subject to HOEPA, no creditor may finance directly or indirectly any portion of the points, fees or other charges payable to the creditor or any other party in excess of the greater of 3% or $600. Nor may any prepayment penalty or fee required with a loan or other extension of credit which is being refinanced by a mortgage of the same creditor or an affiliate of the creditor be financed in a mortgage transaction subject to HOEPA.

In General:

A creditor may not extend credit in the form of a mortgage referred to as subject to HOEPA to any consumer, unless the creditor has provided to the consumer at such time before the consummation of the mortgage and in such manner as provided in the Regulations:

A) All warning and disclosures regarding the risks of the mortgage to the consumer;

B) A separate written statement recommending that the consumer take advantage of available home ownership or credit counseling services before agreeing to the terms of any mortgage referred to in this section;

C) A written statement containing the names, addresses and telephone numbers of counseling agencies or programs reasonably available to the consumer that have been certified or approved by the Secretary of the Department of Housing and Urban Development, a State housing finance authority, or the agency with jurisdiction over the creditor as qualified to provide counseling on, i) the advisability of a high cost loan transaction, and ii) the appropriateness of a high cost loan for the consumer.

Predatory Tactics:

Some of the common tactics that predatory lenders employ include the following:

A) Telling the consumer that they are his only chance to get a loan or owning a home. This tactic can result in high pressure and hasty decisions

B) Asking the consumer to sign a contract or loan documentation that contains information that is not true.

C) Being told that FHA mortgage insurance or Private Mortgage Insurance insures the consumer against default. Such insurances protect only the lender against default.

D) The cost or loan terms at closing are not what was disclosed earlier.

E) The cost of the home is more than comparable homes in the area.

F) The consumer is told that he can only get a good deal on home improvement loans through a certain lender.

G) The consumer is told that refinancing debt can solve all his financial problems.

Tips for Smart Consumers

Consumers can protect themselves from predatory lenders by following a few simple steps.

A) Avoid aggressive lenders;

B) Attend a home ownership education course. Many are sponsored by the Department of Housing and Urban Development, Fannie Mae and Freddie Mac, consumer counseling groups, mortgage insurance companies and lenders.

C) Interview several real estate professionals and agents, ask for references.

D) Shop for a lender and get references. Be suspicious if a realtor or builder recommend only one lender, there may be a conflict of interest.

E) Read all contracts and disclosures carefully. Be certain that everything is understood clearly and ask questions.

F) Do not sign documents containing blanks. Insert something into every space even if it is only ‘none’ or ‘not applicable’.

G) Do not be pressured into borrowing more money than is needed.

H) Do not be persuaded into making false statements on contracts or loan documents. All of the information on loan applications will be verified so there is a strong possibility of being caught. There are severe penalties for making false statements on loan documents.

I) Do not give in to pressure. Avoid fast-talking Realtors and lenders who are not clear and patient.

J) Do not hesitate to walk away for the deal if it does not make perfect sense or if it does not feel right.

* Portions of Section 226.32 have been paraphrased in this article but the entire text has not been included. For complete information regarding HOEPA refer to Regulation Z in the Federal Register.