Predatory Lending Practices and Home Foreclosures

UPDATED: Jul 15, 2023Fact Checked

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Jeffrey Johnson

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 15, 2023

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UPDATED: Jul 15, 2023Fact Checked

While federal and state predatory lending laws are designed to reduce fraudulent or unfair lending practices, they may actually provide some ammunition for fighting foreclosure. The federal predatory lending law, Home Ownership and Equity Protection Act (HOEPA), has been in existence since 1994, but most states or municipalities have passed their own laws using HOEPA as guidance.

Home Ownership and Equity Protection Act (HOEPA)

Many states rely on HOEPA to define predatory lending in their own statutes. So, it is important to understand the federal law and its basic structure. HOEPA only applies to certain refinance loans; it does not apply to mortgages taken in conjunction with the purchase of a home. HOEPA establishes two “thresholds” which determine whether a loan comes under the act or not. A loan is subject to the act if:

  1. its annual percentage rate exceeds the T-Bill rate for loans with a comparable term by more than eight percent (ten percent if the loan is a junior lien mortgage); and
  2. total fees and points payable by the consumer at or before closing exceed the larger of $625 for 2013 (adjusted annually) or eight percent of the total loan amount. Which charges get counted as points and fees is spelled out in section 32 of Regulation Z, which is where HOEPA’s nickname, Section 32 originates.

HOEPA and Section 32 impose restrictions and additional disclosure requirements on lenders and servicers of loans that meet the two thresholds. Most lenders avoid originating Section 32 loans because they aren’t marketable. On the other hand, many “hard money” loans (loans with a high interest rate and high costs, which often start out as investments), may be subject to Section 32 and state predatory lending laws.

Some of the restrictions imposed by Section 32 include:

  • No balloon payments for loans with less than five-year terms. There is an exception for bridge loans of less than one year used by consumers to buy or build a home.
  • No monthly payments that do not fully pay off the loan and that cause an increase in total principal debt (negative amortization).
  • No default interest rates higher than pre-default rates.
  • No repayment schedules that consolidate more than two periodic payments to be paid in advance from the proceeds of the loan.
  • No penalties for prepaying the mortgage in advance of the term. There are some exceptions.
  • No due-on-demand clauses. There are also a few exceptions to this, such as when the borrower fails to meet the repayment terms.
  • No refinancing of a HOEPA loan into another HOEPA loan within the first 12 months of origination, unless the new loan is in the borrower’s best interest. (This is called “flipping”.)
  • No wrongfully documenting a closed-end, high-cost loan as an open-end loan.
  • No making loans based on the collateral value of a borrower’s’ property without regard to his ability to repay the loan. The law actually prohibits the lender from engaging in a “pattern or practice” of doing this, so proving an individual case may not help.

State Predatory Lending Laws

State predatory lending laws generally follow the HOEPA blueprint by defining high-cost loans in terms of the federal thresholds, and impose a similar collection of prohibitions and requirements.

State laws, however, can still vary from the federal law in one or more important ways:

(1) They may include additional kinds of loans not covered by HOEPA, such as purchases, while excluding others that are covered by the federal law. For example, some states exclude mortgages that are federally insured.

(2) Many states have adopted the HOEPA threshold as a starting point, but include or exclude some charges. For instance, Georgia’s law excludes attorney fees, but only if the borrower has been given the opportunity to select the lawyer. Some states also have more stringent rules about the borrower’s ability to repay the loan.

(3) Remedies may vary. For example, HOEPA does not offer a direct defense to foreclosure, while certain state laws do give the borrower that option.

Conclusion

Predatory lending laws may provide borrowers with some leverage against a foreclosure depending on the types of loans they have and where they live. While these laws seldom provide a way to completely stop a foreclosure, some can reduce the amount of money owed, or give the borrower ammunition with which to renegotiate the loan terms.

Case Studies: Predatory Lending and Home Foreclosure Defense Tactics

Case Study 1: John’s HOEPA Defense Strategy 

John, a homeowner facing foreclosure, successfully utilized the Home Ownership and Equity Protection Act (HOEPA) thresholds and restrictions to challenge his lender. This case study examines how John leveraged HOEPA to defend against foreclosure and negotiate more favorable loan terms.

Case Study 2: Sarah’s State Predatory Lending Defense 

Sarah found herself in a foreclosure situation but discovered that her state’s predatory lending laws offered additional protections beyond HOEPA. This case study explores how Sarah utilized the specific provisions of her state’s laws to defend against foreclosure and potentially avoid losing her home.

Case Study 3: Mark’s Loan Renegotiation Strategy

Mark, facing an imminent foreclosure, used predatory lending laws to his advantage, creating an opportunity to renegotiate the terms of his loan. This case study delves into how Mark leveraged predatory lending laws to reduce his owed amount and negotiate a more manageable repayment plan, potentially saving his home from foreclosure.

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Jeffrey Johnson

Insurance Lawyer

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Insurance Lawyer

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

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