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Section 32 loans (High-Cost Home Loans) and Designation

Hi, Today we are talking about Section 32 loans (high-cost home loans). The homeownership and equity Protection Act or (HOEPA) was established in 1994. HOEPA protects consumers against potential abuses in connection with high-cost home loans.

High-cost loans are also known as (section 32 loans). Section 32 loans are subject to loan term restrictions and additional disclosures.

Section 32 loans

What loans are subject to section 32 designation

Section 32 loan designation can only apply to personal use loans secured by one to four-unit residential property or personal property and uses the borrower’s principal residence.

Section 32 loan designation does not apply to reverse mortgages, new construction loans, Housing Finance Agency loans, and USDA Rural Development section 502 Direct Loans.

Three Coverage Tests Apply

For loans that are subject to section 32 loan designation. 3 coverage tests apply.

  1. annual percentage rate or APR test
  2. points and fees test
  3. the prepayment penalty test

Annual percentage rate or APR test

If the loan passes even one of the above tests. It is a section 32 loan. A loan becomes subject to section 32 under the Apr test.

If it’s APR is greater than the average prime offer rate or APOR for a comparable transaction on the same date by more than 6 points 5 percentage points for first-lien transactions.

8.5 percentage points for first-lien transactions if the residence is personal property and the transaction is for less than $50,000 or 8.5 percentage points for junior lien transactions.

Points and fees test

A loan becomes subject to section 32 under the points and these tests. If the points and fees the borrower pay exceed.

5% of the total loan amount for a loan of twenty-one thousand five hundred and forty-nine dollars or more in 2020 or the lesser of eight percent or One thousand seventy-seven dollars for a loan of less than twenty-one thousand five hundred and forty-nine dollars in 2020.

Prepayment Penalty Test

The threshold amounts are adjusted annually for inflation. Finally, a loan becomes subject to section 32 under the prepayment penalty test.

If a prepayment penalty is charged more than thirty-six months after the loan transaction is consummated on a clothes and loan or account opening on an open-end loan or exceeds in aggregate more than two percent of the prepaid amount.

At a couple, scenarios to see if we can determine if the loans are section 32 loans. Clarence applies for a 250,000 dollar first lien mortgage for the purchase of his first home a condo.

The APR and the mortgage are greater than the APOR for a comparable mortgage by two percent. He pays total points and fees equal to three percent of the loan amount.

The prepayment penalty period will last for four years after the close of his mortgage.

Is this loan subject to section 32 designation?

Yes, the prepayment penalty duration exceeds the threshold set by the section 32 prepayment penalty test. Recall that exceeding even one of the three-section 32 test thresholds subjects a mortgage to section 32 designation.

Thus Clarence’s mortgage is a section 32 loan. Subject to term restrictions and additional disclosures.

Margot (woman) applies for a home equity line of credit or HELOC of $40,000 which will be secured by her home a single-family residence. The loan will be a junior lien on her home.

The APR on the HELOC exceeds the APOR by 7%. She pays points in fees of two percent of the loan amount. The HELOC does not charge an early closure or prepayment penalty.

Is this loan subject to section 32 designation?

no Margo’s HELOC (Home Equity Line of Credit) does not exceed any of the threshold set by the three-section 32 tests. Thus it is not subject to section 32 designation.

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