Know Your Home Equity Loan Rights

Demand for home equity loans has grown steadily in the past 20 years. Back in 1986, Congress eliminated the tax deduction for interest on consumer debt, but upheld the deduction on mortgages and loans backed by mortgages. If you obtain a home equity loan, it's important to understand the Home Equity Loan Consumer Protection Act so that you can go into your loan with your eyes wide open, and be protected.

Getting a home equity loan can be overwhelming, but the Home Equity Loan Consumer Protection Act can put your mind at ease. It protects your rights as a consumer, and eliminates scenarios in which you could be the victim of fraud. Review the following highlights of the act before signing on the dotted line.

Lenders must disclose information

A lender must inform you of certain loan details. This will include:

• Interest rates, including details of variable rates.
• A statement explaining that you could lose your home, which serves as collateral on the loan.
• An explanation of any terms that are subject to change.
• Your right to rescind (to change your mind about getting the loan).
• Specifics regarding balloon payments.

There are also four non-disclosure requirements that lenders must adhere to that Congress added in 1988:

• Variable rates must be determined by a public index that the lender has no control over.
• A lender can only accelerate the outstanding balance if you're in breach of contract, or in default.
• The lender is not allowed to change the terms of a home equity loan after you've signed the contract.
• You have the right to rescind if any terms change before your account is officially opened.

Your right to rescind

If you're using your primary residence as collateral on your home equity loan, you can rescind for any reason, up to three business days after you sign the loan documents. You'll need to notify the lender in writing, and it must be postmarked within the three-day period. If you follow these rules, the lender must return all monies to you without penalties or finance charges, within 20 days. If it takes longer, the lender must pay you interest.

The three-day period mentioned above is called the "cooling off period." Until midnight on the third business day from disclosure, the lender may not disburse funds, except into escrow. Additionally, the lender may not begin providing any services or delivering any materials to you. You can rescind during the cooling off period without incurring any financial penalties.

Enforcement

If you feel that your rights under this act have been violated, enforcement can be found under the Truth in Lending Act (TILA). The statute of limitations allows consumers one year to raise TILA violations. Remedies include actual and statutory damages, and coverage of attorney's fees, if the consumer wins.

By knowing about, and understanding, the Home Equity Loan Consumer Protection Act, you can enter into a loan with your eyes wide open and know whether or not you're being treated fairly.