DO YOU KNOW...?
- What HOEPA stands for?
- What Federal Regulation it amended and how?
- Why Section 32 loans are called Section 32 loans?
- What type of loans they usually are?
- What sets these loans apart from others?
- What additional disclosures are necessary to provide the borrower?
- What terms are prohibited in these loans?
- Whether or not a Section 32 loan can include a prepayment penalty?
- Whether or not it can have a demand feature?
ANSWERS:
- The Home Ownership and Equity Protection Act of 1994.
- HOEPA amended the Truth in Lending Act by adding disclosure requirements for high-rate, high-fee loans.
- The loans covered under HOEPA may be called Section 32 loans because that is the section of Regulation Z in which they are defined: Regulation Z 226.32.
- They are usually refinances or home equity loans with high interest rates or high up-front costs.
- A Section 32 loan is defined as a closed-end loan secured by the borrower’s principal residence (but not a reverse mortgage or a loan used for purchase or construction of the residence) in which either:
- the APR is more than 8% for a first lien loan, or 10% for a subordinate lien loan, above the yield on Treasury securities having comparable maturity periods; or
- the total fees and/or points exceed the greater of 8% of the total loan amount or minimum threshold ($592 for 2011, $611 for 2012) set by the Federal Reserve Board annually. This figure includes the non-interest finance charges disclosed in the early Truth in Lending disclosures, as well as any real-estate related closing costs that are not reasonable or are paid to a third party affiliated with a lender, or if the lender receives any direct or indirect compensation in connection with the charge.
- In addition to other Truth in Lending disclosures, a Section 32 loan requires the following disclosures to be provided to a borrower at least three business days prior to consummation:
- The following statement: “You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.”
- The annual percentage rate.
- The amount of the regular monthly (or other periodic) payment and the amount of any balloon payment.
- For variable-rate transactions, a statement that the interest rate and monthly payment may increase, and the amount of the single maximum monthly payment, based on the maximum interest rate required to be disclosed.
- For a mortgage refinancing, the total amount the consumer will borrow, as reflected by the face amount of the note; and where the amount borrowed includes premiums or other charges for optional credit insurance or debt-cancellation coverage, that fact must be stated, grouped together with the disclosure of the amount borrowed. The disclosure of the amount borrowed is considered accurate if it is not more than $100 above or below the amount required to be disclosed.
- In general, a Section 32 loan cannot include a prepayment penalty for paying all or part of the principal before the date on which the principal is due, including a computation of a refund of unearned interest by a method that is less favorable to the consumer than the actuarial method.*
However, a prepayment penalty is allowed if the penalty will not apply:
- beyond two years following consummation; or
- to prepayment from funds resulting from refinancing by the lender or its affiliate;
- at consummation, total monthly debt payments do not exceed 50% of the consumer’s monthly gross income; and
- the amount of the periodic payment of principal and/or interest cannot change during the four-year period following consummation.
- A Section 32 loan cannot include the following terms:
- A payment schedule with regular periodic payments resulting in a balloon payment, if the loan term is less than five years (except for a bridge loan of less than one year used to purchase or construct the borrower’s principal dwelling)
- Negative amortization due to a payment schedule with regular periodic payments causing the principal balance to increase
- Advance payments, resulting from a payment schedule that consolidates more than two periodic payments and pays them in advance from the proceeds
- An increase in the interest rate after default
- A refund calculated by a method less favorable than the actuarial method* for rebates of interest arising from a loan acceleration due to default
- A Section 32 loan can have a demand feature that allows the lender to terminate the loan in advance of the original maturity date and demand repayment of the entire outstanding balance, only if the consumer:
- committed fraud or material misrepresentation in connection with the loan; or
- fails to meet the repayment terms for any outstanding balance; or
- through action or inaction, adversely affects the lender’s security for the loan, or any right of the lender in the security.
*The actuarial method is a method of calculating prepaid interest refunds that approximates the interest actually earned on a day-by-day basis; for a one-year loan, the interest is 1/365 per day.