Section 32 Disclosures

Three days prior to closing, the borrower must receive a disclosure stating the amount borrowed (as reflected by the face amount of the note), whether credit debt-cancellation insurance is included, and whether there is a balloon payment. The APR disclosure must be given with large, 24 point, bold type across the top stating the borrower is not required to complete the transaction and that loss of the home could result from the loan if payments are not met.

Section 32 Prohibits

Loan Flipping

High-cost loans lenders are prohibited from “loan flipping,” or the practice of repeatedly refinancing a loan with no true benefit to the borrower. No HOEPA loan can be refinanced within twelve months of the initial extension of credit. The only exception allowed is for a refinancing that is “in the borrower’s interest.”

The regulations do not define the circumstances in which it is in the borrower’s interest to refinance. However, the FRB has stated that the borrower’s interest exception should be narrowly construed and a creditor must point to facts illustrating the benefit to the borrower, not merely rely on the borrower’s statement that the refinancing is in his or her interest.

Lending Without Regard to Repayment Ability

Lenders must verify and document a borrower’s ability to repay a loan. Failure to do so will result in the assumption that the creditor made the loan without the mandatory verification and documentation. The purpose of this regulation is to prevent creditors from making loans that the borrower cannot reasonably afford—pre-meditated foreclosure. It also dissuades creditors from using inaccurate information and ensures that they use independent sources to verify a borrower’s ability to repay.

Closed-End Loans as Open-End Credit

Some lenders will structure Closed-End/Installment Loans as Open-End Lines of Credit to avoid regulation under Section 32. If a loan is documented as open-end credit but includes terms that demonstrate it does not meet the definition of open-end credit, the loan is subject to the rules for closed-end credit including Section 32 of Regulation Z.

In order to determine if the rate or fee trigger would be met, the regulations consider:

• The amount of money the borrower originally requested
• The amount of the first advance or the highest outstanding balance
• The amount of the credit line

Other Section 32 Prohibitions

• Due-on-Demand Clauses are only allowed to protect the creditor from misrepresentation or any action made by the borrower that adversely affects the lender’s security for the loan.
• Balloon Payments are not allowed for loans with terms of less than five years, except for bridge loans.
• Negative Amortization
• Increased Interest Rate after Default
• Advance payments are restricted, and do not allow from more than two periodic payments to be paid from the proceeds of the loan.
• Prepayment penalties can only be assessed within the first five years of the loan.
• Single premium credit life insurance premiums may be financed, but the cost must be included as part of the APR calculation.