Don’t Lose Your Home (2006)

How to Avoid Home Equity Loan Fraud

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 homeowners, 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 homeowners 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.

Notification required

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), title insurance for the lender and for you, the homebuyer, and closing costs and loan initiation fees (commission for the lender).

This information must be given to you on a standardized form called the HUD-1 Settlement Statement. This form lists the “settlement services” which you may be required to get and pay for. These services are itemized in Section L of the HUD-1 Settlement Statement.

You can use Section L as a guide to compare the services of lenders and title companies. Compare these costs carefully, because settlement fees and title insurance services can inflate the cost of your loan. Go to an online guide to the HUD-1 Settlement Statement.

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:

• You sign the loan contract.
• You receive disclosure of all the loan terms, as required by the Truth in Lending Act.
• 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

(Note to California residents: The California Financial Code defines certain high cost loans as “covered loans,” which loans are subject to various requirements, restrictions, standards and penalties. Go to SPECIAL SECTION: California-specific laws and Resources.

The federal Home Ownership and Equity Protection Act of 1994 (HOEPA) protects you if you are refinancing your mortgage or applying for a home equity line of credit or loan. The law addresses deceptive and unfair practices in home equity lending and establishes requirements for certain loans with high rates and/or high fees. (The rules for these loans are contained in Section 32 of Regulation Z, which implements the TILA, so the loans also are called "Section 32 Mortgages.")

A loan is covered:

• If the original mortgage on the property has an annual percentage rate (APR) that is at least eight percentage points higher than the rates on Treasury securities of the same maturity.
• If a second mortgage has an APR that is more than 10 percentage points higher than the rates on Treasury securities of comparable maturity; or
• If the total fees and points payable by the consumer at or before closing exceed the larger of $528 or eight percent of the total loan amount. (Note: $528 is for 2006. This amount is adjusted annually based on changes in the Consumer Price Index.) Credit insurance premiums (PMI, or private mortgage insurance) are counted as fees.

For example, if the rate on a 30-year Treasury security is 6.27%, any second mortgage or refinancing with a rate of 15% 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 rescission, 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 (settlement) costs including lender’s title insurance and appraisal fees.
• 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.

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.

Contractors at 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 homeowners.

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 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.

Thirty-nine states, including California, require contractors to be licensed or registered. 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. Go to California Specific Resources.

Before taking out a home loan, ask these questions:

• How much money am I borrowing? What is the total amount of interest and fees that I must pay for this 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?

National Resources

The Better Business Bureau
(703) 276-0100 or check local phone directory
- Contact for complaint information on local businesses.

Consumer Action
415-777-9635 or 213-624-8327
TTY: (415) 777-9456
- Provides consumer advice and referrals to complaint-handling agencies. Leave a message and a counselor will call you back. Chinese, English and Spanish spoken.

Consumer Credit Counseling Service
800-777-PLAN
- Evaluates loans and offers counseling on foreclosure, default and debt management.

Federal Trade Commission
(877) 382-4357
- Accepts complaints from consumers for use in investigating patterns of possible violations of the law and offers a wide range of publications on loans, home improvement and consumer rights. (It does not resolve individual complaints.)

Federal Emergency Management Agency
(800) 480-2520
- Offers publications about federal disaster relief programs.

National Association of Consumer Advocates
- Tips on finding a consumer attorney and listings of member attorneys organized by area of expertise.

National Fraud Information Center
(800) 876-7060
- Information and publications on fraud.

SPECIAL SECTION: California-specific laws and Resources

The California Financial Code defines certain high cost loans as “covered loans,” which loans are subject to various requirements, restrictions, standards and penalties. A “covered loan” is one that does not exceed the most current conforming loan limit for a single-family first mortgage loan established by the Federal National Mortgage Association (FNMA) and which exceeds specified points, fees, and/or includes APRs that exceed a defined limit in comparison to Treasury Securities of a similar term.

For 2006, the conforming FNMA loan limit is set at $359,650 for loans/mortgages secured by single-family properties. This law adjusts the covered loan limits automatically to track with FNMA conforming loan limits.

The following are disclosures required in covered loan transactions:

• At least three business days prior to closing the loan, the lender or mortgage broker must disclose in writing to the borrower all prepayment penalty and the rates, points, and fees for the “covered loan” that would be charged as compared to the rates, points, and fees for accepting a “covered loan” without a prepayment penalty.
• A “covered loan” cannot contain any provision for negative amortization, unless the “covered loan” is a first (senior) mortgage. the lender or mortgage broker must disclose to the borrower that the loan contains a negative amortization provision that may add principal to the balance of the loan.
• A “covered loan” shall not be made unless the following disclosure, written in 12-point font or larger, has been provided to the borrower no later than three business days prior to signing of the loan documents for the transaction:
  
  CONSUMER CAUTION AND HOME OWNERSHIP COUNSELING NOTICE
  
  If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.
  
  Mortgage loan rates and closing costs and fees vary based on many other factors, including your particular credit and financial circumstances, your earnings history, the loan-to-value requested, and the type of property that will secure your loan. Higher rates and fees may be justified depending on the individual circumstances of a particular consumer’s application. You should shop around and compare loan rates and fees.
  
  This particular loan may have a higher rate and total points and fees than other mortgage loans and is, or may be, subject to the additional disclosure and substantive protections under Division 1.6 (commencing with Section 4970 of the Financial Code. You should consider consulting a qualified independent credit counselor or other experienced financial adviser regarding the rate, fees, and provisions of this mortgage loan before you proceed. For information on contacting a qualified credit counselor, ask your lender or call the United States Department of Housing and Urban Development's counseling hotline at 1-888-466-3487 or go to HUD counselors online
  
  You are not required to complete any loan agreement merely because you have received these disclosures or have signed a loan application. If you proceed with this mortgage loan, you should also remember that you may face serious financial risks if you use this loan to pay off credit card debts and other debts in connection with this transaction and then subsequently incur significant new credit card charges or other debts. If you continue to accumulate debt after this loan is closed and then experience financial difficulties, you could lose your home and any equity you have in it if you do not meet your mortgage loan obligations.
  
  Property taxes and homeowner's insurance are your responsibility. Not all lenders provide escrow services for these payments. You should ask your lender about these services.
  
  Your payments on existing debts contribute to your credit ratings. You should not accept any advice to ignore your regular payments to your existing creditors.
• Upon request, the lender or mortgage broker issuing a “covered loan” must provide to its licensing agency or to the borrower, at no cost, documentation that clearly demonstrates whether the loan is a “covered loan.” This documentation shall include, but not be limited to, full disclosure of the original principal balance, the annual percentage rate (APR), and the total point and fees, as defined in Financial Code Section 4970.

California Specific Resources

Department of Corporations (DOC)
Consumer Service Office
1515 K Street, Suite 200
Sacramento, CA 95817
866-275-2677

The DOC, among other things, has enforcement authority over the following laws:

• California Residential Mortgage Lending Act – This act regulates the activities of Residential Mortgage Lenders or RML licensees.
• California Finance Lenders Law – This law regulates the activities of California Finance Lenders or CFLs.
• Escrow Law – This law regulates the activities of independent escrow companies.

The status of an RML or CFL license may be verified through the DOC Web site.

Contractors State License Board (CSLB)
The CSLB licenses and regulates contractors in more than 40 license classifications that constitute the construction industry. The CSLB also registers home improvement salespersons, and offers arbitration for resolution of disputes that meet certain criteria. The agency provides consumer information and allows consumers to verify the license status of a contractor.

9821 Business Park Drive
Sacramento, CA 95826
916-255-3900
24-Hour Licensing and Consumer Information: 800-321-2752

California Housing Finance Agency (CalHFA)
CalHFA’s mission is to finance below-market rate loans to create safe, decent, and affordable rental housing and to assist first-time homebuyers in achieving the dream of home-ownership. CalHFA assists low and moderate-income homebuyers in the realization of their goal of home-ownership in California. CalHFA offers below market interest rate 30 year fixed loans to first-time buyers who meet the income and sales price limits for the County in which they wish to purchase.

1121 L Street, 7th Floor
Sacramento, CA 95814,
916-342-1250

100 Corporate Pointe, Suite 250
Culver City, CA 90230,
310-342-1250

Office of Real Estate Appraisers (OREA)
OREA licenses real estate appraisers and ensures adherence to the national Uniform Standards of Professional Appraisal Practice (USPAP), California Law and regulations. They also investigate complaints against appraisers. It provides consumer information and can be used to verify the license status of an appraiser.

1102 Q Street, Suite 4100
Sacramento, CA 95814
916-552-9000 or 916-447-7878

Department of Insurance
Consumer Communications Bureau
300 South Spring Street, South Tower
Los Angeles, CA 90013
800-927-4357
The Department of Insurance, among other things, licenses and regulates California title insurance companies that issue policies of title insurance and may conduct escrow activities.

Department of Financial Institutions (DFI)
DFI licenses and regulates state-chartered banks, credit unions, and savings and loans; foreign banks; business & industrial development corporations; issuers of travelers checks and money orders.

300 S. Spring Street, Suite 15513
Los Angeles, CA 90013

801 K Street, Suite 2124
Sacramento, CA 95814

Department of Consumer Affairs (DCA)
800-952-5210
Call for advice and referrals on all consumer problems.

Department of Fair Employment and Housing (DFEH)
800-233-3212
DFEH may investigate and/or resolve complaints of unlawful discrimination in housing or lending practices.

© Consumer Action 2006

Published / Reviewed Date

Published: October 18, 2006

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Foreclosure   ♦   Fraud/Scams   ♦   Housing   ♦   Home Financing   ♦   Home Repair   ♦   Mortgages   ♦  

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