Published: October 01, 2000

Don’t Lose Your Home

How to Avoid Home Equity Loan Fraud (2000)

A brochure that explains how a "home equity loan" allows you to borrow money against your home's equity. However, your home secures the loan; if you are unable to make the home equity loan payments, you can lose your house. This fact sheet explains the need for caution when agreeing to such loans.

If you're like most home owners, your house is the most important and valuable thing you own. The money you've put into your home can enable you to borrow money with a home equity loan. Your home secures the loan—unfortunately, you can lose your home if you are unable to make the loan payments.

You may consider a home equity loan to make improvements or home repairs, or you may be forced to borrow money for repairs because of a disaster such as an earthquake, fire or flood.

To compare home equity loan rates in your area, visit the BankRate site (www.bankrate.com). The site contains calculators to help you figure out if you can afford a loan.

Home equity loan fraud

In most cases, it is legal for someone who lends you money secured by your home to seize your home if you do not make all the payments on time. Because of this, dishonest individuals have found ways to rip off home owners with high rate, high fee home loans that are impossible to repay. This is called home equity loan fraud.

Someone might arrive at your door without an invitation offering to do repairs and help you finance repairs. They'll talk you into taking out a home equity loan that you can't afford to repay, and then legally obtain ownership of your house.

For example, a woman in San Francisco was tricked into signing a loan contract that required more than $3,000 per month in payments, although her fixed monthly income was only $900. The lender foreclosed on the woman's home and evicted her.

Disclosure of loan terms is required by law

The federal Truth in Lending Act requires the lender to inform you of all the terms and costs of the loan when you receive an application, including the annual percentage rate (APR). Additional costs include "points" (each point equals one percent of the loan amount), appraisal fees (for inspecting the property), and closing costs and loan initiation fees (commission for the lender).

Your right to cancel

Federal law gives you three days after signing a home equity loan contract to cancel the deal, for any reason. This is called your "right of rescission." The three days, excluding Sunday, begin after all three of the following things happen:

1. You sign the loan contract.
2. You receive disclosure of all the loan terms, as required by the Truth in Lending Act.
3. You receive two copies of a notice explaining your right of rescission.

To cancel the contract, you most notify the lender in writing. Send your letter by certified mail by the third day with a return receipt requested. Also fax the letter or send a telegram to immediately notify the lender. Keep copies of your letter and all other paperwork. Within 20 days of rescinding, you must receive a full refund of all money you paid to the lender (with some exceptions).

High rate, high fee loans

Federal law requires you be given more information and special protections if your loan is a "high rate, high fee loan"—a refinancing loan secured by your home or a second mortgage with an interest rate that is at least 10 percentage points higher than the rates on Treasury securities of the same maturity.

For instance, if the rate on a 30-year Treasury security is 6.27%, any second mortgage or refinancing with a rate of 16.27% or higher will trigger the requirement. If the lender violates the law, you may have up to three years to cancel the loan and you may sue the lender for violating the law.

On high rate, high fee loans, in addition to written notice of your three-day right of recission, you must be given a warning notice that you could lose your home and any equity you have built up in your home. Under the law, these features are specifically banned from high rate, high fee loans:

• Balloon payments, a very large lump sum payment due at the end of the loan because the regular payments are not enough to pay off the loan.
• Negative amortization, when your monthly payments do not cover the amount borrowed and the interest you owe. When that happens, you end up owing much more than you borrowed even after you have made all the required payments.
• Default, or penalty rates—higher interest rates charged to consumers who fall behind on their payments.
• Any requirement that more than two payments be made in advance from the proceeds of the loan.
• Most prepayment penalties (a charge for paying off the loan early).

Home equity loan tips

• Never let yourself be rushed into signing for a loan secured by your home. Always insist on a few days to think about it.
• Don't let family members or friends talk you into taking out or co-signing a loan on your home for their own purposes. Look for other ways to help them out of financial difficulties, such as recommending debt counseling.
• Shop around. Before you decide on a loan, meet with several different lenders, including large banks, small community institutions and credit unions.
• Review the contract with someone you trust and have a lawyer review the document. Many local bar associations, senior organizations and local colleges have low-cost lawyer services, well worth the money when you are putting your house on the line.
• Never sign any document that contains blank lines that could be filled in after you sign.
• Make sure you understand everything in the contract. Find out all the costs of the loan, including the APR (annual percentage rate), fees, points and closing costs.
• Be extra cautious about using a contractor recommended by a lender, and vice versa. When choosing a contractor, get personal references and check them, and contact the appropriate government licensing agency to verify that the contractor is licensed.
• If you negotiated in a language other than English with a loan broker or personal finance company, ask if a translation of the contract is available.

Explore your options after a disaster

After a disaster, check with your insurance company to see if you are covered for home repairs. Money may also be available through federal and state relief programs.

Beware of contractors who come to the door

Do not trust contractors who show up unasked and say that you need home repairs or other work done, especially if they recommend a lender to finance the work. Sometimes dishonest lenders work with building contractors to deceive home owners.

The federal "cooling off rule" requires salespeople—including contractors—who come to your home to sell products or services to tell you that you can cancel the sale within three business days and receive a full refund when the purchase price is $25 or more. You must be given a summary of your right to cancel and a cancellation form.

Check out all contractors

Never use a contractor until you have checked them out. Contact the appropriate licensing agency and call to verify that the company is licensed. Ask if there are any complaints or disciplinary actions against the contractor.

Only 36 states require contractors to be licensed. If you live in a state with no license requirement, call your district attorney, consumer protection office and the Better Business Bureau to see if they have received any complaints.

Before taking out a home loan, ask these questions:

• How much money am I borrowing? What is the total amount, including fees and interest, that I will need to pay off the loan?
• What is the annual percentage rate of interest (APR)?
• Will I be paying a "fixed" interest rate, or will it change over time ("adjustable" rate)?
• How does the quoted rate compare with those of other lenders?
• What fees, points and closing costs will be added on to the loan?
• Is there a "balloon" payment (a single very large payment at the end of the loan)?
• How much are my monthly payments? For how many months?
  Will I have enough to live on each month after making the loan payment? Can I really afford this loan?
• Do I really need the repairs or home improvements?
• Will I have to pay a prepayment penalty fee if I pay off the loan early or refinance with another lender?

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Keywords

Home Repair, Housing, Home Equity Loan, Money For Home Repair, Home Financing

Sponsors

Bank of America Consumer Education Fund (BACEF)

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Filed Under

Fraud/scams   ♦   Housing   ♦   Home Financing   ♦   Home Repair   ♦  

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