Protecting Your Equity

The Home Ownership and Equity Act protects you against deceptive and unfair practices when getting a mortgage or home equity loan. Loans with high rates or fees are covered under this legislation and are called Section 32 Mortgages. These loans carry an interest rate that is more than 10 percentage points over U.S. Treasury securities rates of the same timeframe. These loans DO NOT include loans to purchase or construct a new home, reverse mortgages (click here), or home equity lines of credit (click here). You must receive several disclosures from the lender within three days before the loan has been closed.

The lender MUST AGREE to dismiss the loan if you, within three business days, decide not to sign the loan after receiving these disclosures. You must also be notified that you will lose your home and any monies that you have paid if you miss any payments. Finally, the lender must also disclose the APR and the regular payment amount in writing. This includes any "balloon" payments due at the end of the loan. If there is a variable rate, they also must disclose how this rate is computed.

Lenders are BANNED from requiring "balloon" payments which are more than twice the amount of the regular payments for loans under five year terms. This includes plans where regular payments do not cover the principal balance. They are also specifically denied the right to have what is referred to as negative amortization. This situation occurs when the regular payments are so small that you actually have an increase in your debt level every month.

Default rates are closely scrutinized as well. They may not be greater than pre-default rates. Lenders must also use the actuarial method when computing rebates of interest upon default and prepayment penalties. An exception occurs for prepayments that are financed from another lender and fall within the first five years of execution. Institutions must also follow "good" judgement when granting you a loan. This means that they must estimate your ability to pay and not just your collateral value.

Note: You have the right to sue your lender if the above conditions are not met. If a lender is in violation of any statutes, you may also file a complaint with the FTC:

Consumer Response Center
Federal Trade Commission
600 Pennsylvania Avenue
Washington, DC 20580
(877) 382-4357
(202) 326-2502