Home Ownership and Equity Protection Act Requires Lender's Attention | Hill Wallack (2024)

January 1, 1900

Predatory lending, that is, unscrupulous conduct engaged in by some lenders when providing selected types of consumer mortgage loans, harms consumers, contributes to high foreclosure rates, and hurts legitimate lenders. Several states apply consumer protection laws to prevent such practices. However, current federal law also imposes requirements in order to protect borrowers. For example, lenders who provide consumer mortgage refinancing and home equity loans must comply with the "Home Ownership and Equity Protection Act of 1994" (HOEPA).

HOEPA amended the "Truth in Lending Act". It was intended to address deceptive and unfair practices in home equity lending and established new requirements for certain high rate and high fee loans.

Disclosures Required

HOEPA applies to a loan if the annual interest rate exceeds U.S. Treasury security rates of comparable maturity by more than ten percent or the total points and fees which must be paid by the consumer exceed eight percent of the loan amount (or an adjusted annual figure set by the Federal Reserve Board which is based upon the Consumer Price Index). HOEPA does not apply to reverse mortgages, new purchases, or construction or home equity lines of credit.

If a loan is subject to HOEPA, the lender must make certain disclosures to the borrower at least three days before the loan is finalized. The lender must provide the borrower written notice that the loan need not be completed even though the loan application has been signed. In addition, the notice must disclose the annual percentage rate of interest charged for the loan, must indicate that the consumer can lose his or her home if he or she fails to make the mortgage payments and must provide the amount of the regular payments. The consumer must be given three business days to cancel the loan transaction after receiving the disclosures and must acknowledge receipt of these notices. These disclosures are in addition to any required by the Truth in Lending Act.

HOEPA prohibits the use of certain loan features and transactions. Specifically barred are:

Small monthly payments which do not fully pay off the loan and which cause an increase in total principal debt;

Default interest rates higher than pre-default rates;

Rebates of interest upon default calculated by any method less favorable than the actuarial method;

See Also

If I can't pay my mortgage loan, what are my options? | Consumer Financial Protection Bureau

Loan repayment schedules which consolidate two or more periodic payments that are paid in advance from the loan proceeds;

Balloon payments with less than five-year terms, where the regular payments do not pay off the principal balance and a lump sum (balloon) payment of more than twice the amount of the regular payments is necessary. (There is an exception for bridge loans of less than one year);

Failure to disburse home improvement loans directly to the consumer, jointly to the consumer and the home improvement contractor, or to an escrow agent; and

Engaging in a pattern of lending based on the collateral value of the property securing the loan without regard to the consumer's ability to repay the loan.

Penalties Can Be Severe

If a lender violates HOEPA, the borrower may have the right to sue for statutory and actual damages, attorneys' fees, and costs of suit. In addition, the consumer may be able to cancel the loan.

Recent lawsuits charging predatory lending have resulted in the payment of huge monetary settlements. For example, in September, 2002, the Federal Trade Commission announced that Citigroup, Inc. which had acquired national mortgage lender Associates First in 2000, will pay $215 million to resolve charges that Associates First had engaged in and resulted in systematic and widespread deceptive and abusive lending practices.

A prominent case involved Household International, one of the largest lending companies in the United States. In October, 2002, Household agreed to settle allegations it violated consumer fraud laws in 19 states and the District of Columbia. The cases alleged that Household had misrepresented loan terms and had failed to disclose fees for credit life insurance and other items. The allegations centered on loans made to "sub-prime" borrowers, those who have tarnished credit records or low incomes. Under the settlement, Household will pay between $387.5 million and $484 million to borrowers who took real estate loans between 1999 and the present. Household also agreed to provide more information to potential borrowers and to cap points and origination fees among other things.

The consequences of violating lending regulations thus can be very serious. Lenders are required to be aware of them and to comply with them. The failure to abide by the regulations can become quite expensive. To reduce or eliminate risk, questions regarding appropriate lending practices and how best to comply with applicable laws should be referred to legal counsel.

Alan M. Minato is an associate at Hill Wallack in the firm's Creditors' Rights/Bankruptcy Practice Group. Mr.Minato concentrates his practice in all matters of creditors' rights and bankruptcy, including workouts, foreclosures, replevin actions and collection.