Home Equity Act
Homeowners are protected from corrupt equity lending practices under the Home Ownership and Equity Protection Act of 1994. HOEPA, which is an amendment to the Truth in Lending Act, aims to prevent deceptive equity loans by setting requirements for certain high rate and high fee loans.
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Coverage
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HOEPA has a set of requirements for determining what types of loans the act protects. A first-lien loan, i.e., the original mortgage on a home, must have an annual percentage rate at least 8 percentage points higher than securities of comparable maturity issued by the U.S.Treasury Department. Second-lien loans must be at least 10 percentage points higher than the Treasury’s securities of comparable maturity. Also, closing fees must be more than either $579 or 8 percent of the total loan as of 2010.
Disclosures
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Lenders must disclose certain facts to home buyers whose loans are protected by HOEPA. Lenders must provide borrowers with written notice telling them they do not need to sign the loan. The notice must also inform the borrower that he could lose his home if he defaults on its repayment. The act also requires lenders to disclose the full loan amount, the APR and the amount for regular payments. Lenders giving variable-rate loans must state that these rates can change. Lenders must issue the disclosures at least three days before closing.
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Prohibitions
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HOEPA prohibits lenders from certain lending practices. For most loans lasting less than five years, balloon payments are not permitted. These are loans that do not require borrowers to pay off regular balances but instead require them to pay off lump sums, more than double regular balances. Lenders are also not allowed to issue amortization loans, which are loans less than monthly balances. These loans may cause borrowers to have to repay a larger debt because of interest rates extended over a longer period of time. Moreover, default interest rates, which are the rates that loan repayments convert to, cannot be more than pre-default rates. Oftentimes, when a borrower violates a loan contract, the rate reverts to a default rate, which is significantly higher as a penalty. HOEPA prevents many lenders from increasing interest rates as a penalty. Furthermore, lenders cannot penalize borrowers, in most cases, for paying off loans early.
Violations
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Home loan borrowers who believe a lender has violated HOEPA can contact the Federal Trade Commission (FTC). Borrowers can sue lenders for violations. If successful in litigation, homeowners can receive actual and statutory damages, as well as payment of court costs and attorneys' fees. Moreover, borrowers who win lawsuits have the right to cancel their loan contracts for up to three years after the court ruling.
Exclusions
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HOEPA's strongest regulations are targeted towards the subprime mortgage market. In 2009, Congress passed new rules for HOEPA, which add to those protections and more clearly define what types of mortgages are protected. But certain loans and mortgages are not included in the act, including home equity lines of credit, reverse mortgages, construction-only loans and bridge loans.
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References
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