Home Ownership and Equity Protection Act - Prohibited Features and Practices
Prohibited Features
Under the Home Ownership and Equity Protection Act (HOEPA), a high-rate or high-fee loan may not contain:
(1) A balloon payment (i.e., the regular payments do not fully pay off the principal balance, and a lump sum payment of more than twice the amount of the regular payments is required) for a loan with less than a five-year term. However, HOEPA does not prohibit balloon payments in bridge loans of less than one year that are used by borrowers to buy or build a home.
(2) Negative amortization, which involves smaller monthly payments that do not fully pay off the loan and that cause an increase in the borrower's total principal debt.
(3) Default interest rates higher than pre-default rates.
(4) Rebates of interest upon default calculated by any method less favorable than the actuarial method.
(5) A repayment schedule that consolidates more than two periodic payments that are to be paid in advance from the proceeds of the loan.
(6) Most prepayment penalties, including refunds of unearned interest calculated by any method less favorable than the actuarial method. However, such penalties are permitted if:
* the lender verifies that the borrower's total monthly debt (including the mortgage) is 50 percent or less of the borrower's monthly gross income;
* the borrower obtains the money to prepay the loan from a source other than the lender or an affiliate lender; and
* the lender exercises the penalty clause during the first five years following execution of the mortgage.
(7) A due-on-demand clause. However, HOEPA permits such a clause if:
* there is fraud or material misrepresentation by the borrower in connection with the loan;
* the borrower fails to meet the repayment terms of the agreement; or
* there is any action by the borrower that adversely affects the lender's security.
Prohibited Practices
HOEPA prohibits a lender from:
(1) making loans based on the collateral value of a borrower's property without regard to his ability to repay the loan. In addition, proceeds for home improvement loans must be disbursed either directly to the borrower, jointly to the borrower and the home improvement contractor, or, in some situations, to the escrow agent.
(2) refinancing a HOEPA loan into another HOEPA loan within the first 12 months of origination, unless the new loan is in the borrower's best interest. The prohibition also applies to assignees holding or servicing the loan.
(3) wrongfully documenting a closed-end, high-cost loan as an open-end loan. For example, a high-cost mortgage may not be structured as a home equity line of credit if there is no reasonable expectation that repeat transactions will occur.
Copyright 2010 LexisNexis, a division of Reed Elsevier Inc.
