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High-Rate, High-Fee Loans
(Section 32 Mortgages)

May 1996


If you're refinancing your mortgage or applying for a home equity installment loan, you should know about the "Home Ownership Equity Protection Act of 1994." The law addresses certain unfair practices in home equity lending. It amends the Truth in Lending Act (TILA) and establishes new requirements for certain loans with high-rates and/or high-fees. The rules for these loans are contained in Section 32 of Regulation Z, which implements the TILA, so the loans also are called "Section 32 Mortgages." Here's what loans are covered, the law's disclosure requirements, prohibited features, and actions you can take against a lender who is violating the law.

What Loans Are Covered?

A loan is covered by the law if it meets the following tests:

The rules primarily affect refinancing and home equity installment loans that also meet the definition of a high-rate or high-fee loan. The rules do not cover loans to purchase or initially construct your home, reverse mortgages, or home equity lines of credit (similar to revolving credit accounts).

What Disclosures Are Required?

If your loan meets the above tests, you must receive several disclosures at least three business days before the loan is finalized:

These disclosures are in addition to the other TILA disclosures that you must receive no later than closing of the loan.

What Practices Are Prohibited?

The following features are banned from high-rate, high-fee loans:

Creditors also are prohibited from engaging in a pattern or practice of lending based on the collateral value of your property without regard to your ability to repay the loan. In addition, proceeds for home improvement loans must be disbursed either directly to you, jointly to you and the home improvement contractor, or, in some instances, to the escrow agent.

How are Compliance Violations Handled?

You may have the right to sue a lender for violations of these new requirements. In a successful suit, you may be able to recover statutory and actual damages, court costs, and attorney's fees. In addition, a violation of the new high-rate, high-fee requirements of the TILA may enable you to rescind (or cancel) the loan for up to three years.

Where to Go for More Information?

The Federal Trade Commission publishes a series of Facts for Consumers brochures on home and real estate issues.

For a complete listing of the FTC's consumer publications, ask for a free copy of Best Sellers. Contact: Public Reference, Federal Trade Commission, Washington, D.C. 20580; (202) 326-2222. TDD: (202) 326-2502. You also can access FTC publications at http://www.ftc.gov on the World Wide Web.