High Cost Home Loans: Your Legal Protections

By: AARP Education & Outreach | Source: AARP.org | April 6, 2006

Thinking about borrowing money? Because of the risks involved, think twice before using the equity in your home to secure the loan. Sometimes there are financial advantages to using your home's equity when you borrow, but most advantages disappear if you have to pay high interest rates and fees on the loan. Home equity loans with high rates, points, or fees are especially risky because you could lose your home if you can't make the monthly payments!

You do have some legal protections when you take a loan secured by your home if the loan has a high interest rate or high fees. That's true whether you have a home equity loan, refinancing loan, or second mortgage. Many of these loans are aimed at older or lower-income homeowners who may have a lot of equity in their homes and may need money to pay for medical expenses or home repairs.

To control the practices used by lenders that charge very high fees and interest rates on home loans, Congress passed the Home Ownership and Equity Protection Act (HOEPA). Under this law, get extra protections if you are sold a HOEPA loan – a loan with "high" interest rates or "high" fees. You have a high interest rate loan if the loan’s annual percentage rate (APR) is 8 points higher than the rate on a Treasury bill for the same length of time. Fees are defined as total fees and points you have to pay up front. They are considered "high" if they equal more than $583 (2009 figure) or 8 percent of the total loan amount, whichever is higher.

Your legal rights if you have a HOEPA loan:

• The lender must give you certain disclosures at least three business days before closing on the loan. For example, you must get a written notice that you could lose your home if you do not make the payments.
• The lender cannot directly pay a home improvement contractor. The check has to be made to you.
• Your loan cannot have a balloon payment (a large final payment) due in less than five years

New amendments to HOEPA that took effect October 2009 will:

• Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan.

• Require creditors to verify the income and assets they rely upon to determine the borrowers' ability to repay.

• Ban any prepayment penalty if the payment can change in the initial four years. For some loans, a prepayment penalty period cannot last for more than two years.

• Require creditors to establish escrow accounts for property taxes and homeowner's insurance for first-lien mortgage loans (phased in through 2010). 

In addition to rules for "higher-priced mortgage loans" other rules include:

• Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home's value.

• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees or not posting payments on the date received.

• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, not just loans to purchase a home.

• The rules also outlaw certain deceptive and misleading advertising tactics, such as advertising that a rate is fixed when it could change.

Even if you do not have a HOEPA loan, you can protect yourself when borrowing money on your home equity by talking to your attorney, financial advisor, or someone else you trust before making any decision. If you have second thoughts after taking out a loan, contact an attorney immediately. If the lender violates HOEPA or any Truth in Lending laws, you have a right to cancel the loan. But you must act quickly. You lose many of your rights if you do not act within three business days.

Take Action

• Refer to AARP's Home Equity Loan Terms Glossary for the meaning of the various words and terms used in home financing. 
• The information you need to decide if a reverse mortgage is a good choice for you.
• To file a complaint about a lender, contact the FTC Consumer Response Center Web site.
• To file a complaint about a bank, you can also contact the Federal Reserve Board.