What is a high cost mortgage loan?
The term "predatory lending" encompasses a variety of practices. Oftentimes homeowners in certain communities – particularly, the elderly and minorities – are targeted with offers of high-cost, home-secured credit. The loans carry high up-front fees and may be based on the homeowners’ equity in their homes, not their ability to make the scheduled payments. When homeowners have a problem repaying the debt, they are often encouraged to refinance the loan. Frequently this leads to another high-fee loan that provides little or no economic benefit to the borrower.

The Home Ownership and Equity Protection Act (HOEPA) as implemented by Federal Reserve Regulation Z – Section 32 – imposes additional disclosure requirements on these types of loans and prohibits certain acts and practices in connection with mortgage lending. HOEPA prohibits extending credit with out regard to a consumer’s repayment ability. HOEPA identifies a high-cost mortgage loan through rate and fee triggers, and it provides consumers entering into these transactions with special protections. HOEPA applies to closed-end home-equity loans (excluding home-purchase loans) bearing rates or fees above a specified percentage or amount. A loan is covered by HOEPA if (1) the Annual Percentage Rate (APR) exceeds the rate for Treasury securities with a comparable maturity by more than 10 percentage points, or (2) the points and fees paid by the consumer exceed the greater of 8 percent of the loan amount or $480 (for 2002, adjusted annually based on the Consumer Price Index). HOEPA restricts certain loan terms for high-cost loans because they are associated with abusive lending practices. These terms include short-term balloon notes, prepayment penalties, non-amortizing payment schedules, and higher interest rates upon default.
- posted by Mark Pane @ 11:42 AM