High-Rate Mortgages, High-Fee Mortgages, the Facts

Mortgage rates today are so low these days you have probably been enticed to refinance a loan or even buy a home if you have been on the sidelines during the housing bust. Obtaining a home loan is probably one of the most expensive and complex choices you'll make in life.

You should know there are laws in place that help protect consumers. The Home Ownership and Equity Protection Act (HOEPA) which was passed in 1994 helps protect consumers from deceptive and unfair practices when dealing with lenders. The HOEPA law amends the Truth in Lending Act (TILA). The law establishes requirements for certain loans with high mortgage rates and closing fees.

The law gives the consumer extra time to decide if loan offered is a good one even if you have already signed the loan application. If the loan triggers the "test" listed below you must receive several disclosures at least three business days before the loan is finalized.

The rules below are mainly for refinancing and home equity loans that also meet the definition of a high-rate or high-fee loan. The rules do not cover loans to buy or build your home, reverse mortgages or home equity lines of credit.

After you read these tests, practices that are allowed and not allowed, if you feel have been cheated or a lender as broken the law you have the right to sue. To file a complaint or get free information on consumer issues, visit ftc.gov. You can also call the FTC at 1-877-382-4357.  TTY: 1-866-653-4261.

If you do sue and win you may be able to recover statutory and actual damages, court costs and attorney’s fees. In addition, a violation of the high-rate, high-fee requirements of the TILA may enable you cancel the loan for up to three years.

High Mortgage Rates

For a first mortgage loan, if the annual percentage rate (APR) exceeds by more than eight percentage points (10 percentage points for a second mortgage) the rates on comparable maturity Treasury securities.

High Mortgage Fees 

If the mortgage fees paid by the consumer at or before the settlement exceed the larger of $592 or eight percent of the total loan amount.

The mortgage loan you receive from a lender meet any of the criteria above the mortgage lender MUST give you written notice stating that the mortgage loan need not be completed. Again, you have three business days to decide whether to sign the loan agreement after you receive these disclosures.

Frankly if any lender is offering you a morgage interest rate that exceeds by eight percent comparable Treasury securities I would run to another lender. Even if you have horrible credit.

To give you can idea of how the rate would differ if you were offered a loan eight percentage points above comparable Treasury securities rates (30 year Treasury yields closed at 3.12% on 4/27)  right now you would be quoted a 30 year rate of 11.12%. Most lenders these days offer 30 year rates at 4.00%.

In this notice the mortgage lender must also warn you that you can lose the home and any money you have put into it if you fail to pay the loan. This is common sense but you'd be surprised how many people buy a home and don't know these laws.

The mortgage lender must also layout the annual percentage rate (APR), this will differ from the mortgage rate since the APR also takes into consideration any fees.

The monthly payments and the total loan amount must be stated. On adjustable mortgages the mortgage lender must disclose that the mortgage rate and monthly payment may increase when current mortgage rates increase. The lender most also state the amount of the maximum monthly payment.

There are also certain features of loans that are not available with high mortgage rate or high mortgage fee loans.  All balloon mortgage payments, where the regular payments do not pay off the principal mortgage balance and a lump sum mortgage payment of more than twice the amount of the regular payments is required on mortgage loans with less than five-year terms.

These loans can't have negative mortgage amortization, which involves smaller monthly mortgage payments that do not fully pay off the home loan and that cause an increase in your total mortgage principal debt.

There are also many other practices that are banned from high rate or high fee mortgage loans. Just be sure you know the lender you're dealing with (check the BBB) or just use a well known bank, credit union or mortgage lender. You should also know what the prevailing mortgage rates are before you contact any lender about a loan. You should also just avoid these types of loans if you can and I don't see why you can't.
Author: Robert Till
April 29th, 2012