Mortgage Smarts: The Home Ownership and Equity Protection Act
The Home Ownership and Equity Protection Act targets predatory lending practices.
When your loan representative mentions HOEPA, he isn't asking you to smash plates in a Greek celebration. No, he's talking about the Home Ownership and Equity Protection Act-legislation that's designed to protect you from getting buried by ultra aggressive loan practices.
If you're in the market for a high-rate home equity loan or refinance mortgage, you should become familiar with the basics of the Home Ownership and Equity Protection Act (HOEPA), which is designed to shield you from getting duped by predatory, unethical lenders. Here's the important part: If a lender violates HOEPA with respect to your loan, you may have the right to sue.
HOEPA loans defined
HOEPA only applies to certain high-rate mortgage refinances and home equity loans, which are defined as follows:
- First mortgage refinances carrying an annual percentage rate (APR) that's more than 8 percentage points higher than the rate on Treasury securities of the same maturity
- Second mortgages carrying an APR that's more than 10 percentage points higher than the rate on Treasury securities of the same maturity
- Mortgage loans on which the closing costs exceed the larger of $561 or 8 percent of the loan amount. (Note that the 2008 number is $561, and it adjusts annually.)
Purchase mortgages, construction loans, reverse mortgages, and home equity lines of credit (HELOCs) aren't covered by HOEPA.
If you apply for a loan that meets the above criteria, the lender must provide additional disclosures to you at least three days before the loan closes. These include a written notice stating that you're not obligated to complete the loan, even though you've already signed the application. The notice must also inform you of the possibility that you might lose your home in foreclosure if you don't make timely loan repayments. Lastly, the lender must provide you with the APR, loan amount, and repayment schedule. If the prospective loan is an adjustable-rate mortgage, the disclosure must note the maximum monthly payment and include a statement that the rate and payment may increase.
Loan features prohibited by HOEPA
Lenders can charge you high interest rates based on your financial qualifications, but aren't allowed to incorporate certain features that unduly inhibit your ability to repay the loan. Features which are specifically banned from HOEPA loans are:
- Balloon payments
- Negative amortization
- Default rates that are higher than the loan's regular rate
- Default interest rebates that are calculated less favorably than non-default rebates
- Due-on-demand clauses for reasons other than misrepresenting yourself in the loan application, causing damage to the home, or failing to make payments on time
Closing a high-rate mortgage may not be an ideal situation, but at least you know there's legislation protecting you from getting gouged. And that's cause for celebration.