JButcher posted this question and this is an abridged answer. It means selling a home to a buyer that does not really qualify for the loan (subprime loans for example) and giving them payments which they can only afford for a short time (the ARMS) and knowing full well they would more than likely get foreclosed on at a later date (like when the ARMs come due) like whats going on now.
HOME OWNERSHIP EQUITY PROTECTION ACT OF 1994
Recent Congressional attention to the problems of predatory mortgage lending has led for calls for the Federal Reserve Board to use its authority under the Home Ownership and Equity Protection Act of 1994 (“HOPEA” or the “Act”)
2 to provide addition protection for consumers with respect to mortgage loans. This article will review the legislative history and provisions of HOPEA, and explain the scope of the authority of the Federal Reserve Board (the “Federal Reserve” or the “Board”) under that statute. Legislative History and Statutory Provisions HOEPA was enacted in 1994 in response to Congressional concerns over “reverse redlining.” According to the Senate Banking Committee report accompanying the legislation, “reverse redlining” is the practice of targeting residents of specific disadvantaged communities for credit on unfair terms, and in particular by second mortgage lenders, home improvement contractors, and finance companies.
3 These lenders were felt to “peddle high-rate,high-fee home equity loans to cash-poor homeowners.”
4 According to the legislative history, the law is not designed to cover purchase money mortgages, but only first and second closed-end loans
5 with high fees and costs, that are used to “skim” the built up equity in the homes of vulnerable consumers.
6 The legislation was also intended to only target the abusive loans, “without materially restricting the flow of credit or imposing an excessive burden on lenders or consumers.”
7 To achieve these goals, HOPEA establishes a class of residential mortgage loans (for purposes of this article only, these loans will be referred to as “high cost”) that are subject to special disclosures and other requirements. A high cost loan is defined as a closed-end, non purchase mortgage loan, secured by a consumer’s principal residence, that has an annual percentage rate in excess of 10 percent above Treasury securities with a comparable maturity, or that has total fees and points that exceed the greater of $400 or 8 percent of the total loan amount. The Federal Reserve is given authority to adjust these triggers, within certain parameters. As adjusted by the Board, the current triggers are 8 percent above Treasuries for a first loan, and 10 percent above Treasuries for a second loan, and the fee trigger has been raised
to the greater of 8 percent of the loan or $547 to reflect inflation.
8 High cost mortgages are subject to additional disclosure requirements, which must be made at least 3 days prior to the loan closing. The Act imposes substantive restrictions on these loans, including prohibitions on prepayment penalties (unless certain conditions are met),
9 penalty interest rates in the event of a default, balloon payments for short-term loans, and negative amortization features. A creditor may not engage in a “pattern or practice” of extending credit through high cost mortgages without regard to the consumers’ repayment ability, including current and expected income, obligations, and employment. Under the Act, a purchaser or assignee of a high cost mortgage is subject to all claims and defenses that could have been raised against the maker of the loan, unless the assignee demonstrates that a reasonable person, exercising ordinary due diligence, could not determine
based on the documents and other disclosures that the mortgage was a “high cost mortgage.”
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