The Truth in Lending Act (TILA) Section 32 housing policy positions protect homeowners engaged in consumer mortgage borrowing from predatory lending practices, such as excessive costs, penalties for late payment and early payoff. TILA, a federal law, was amended by the Home Ownership and Equity Protection Act (HOEPA) in 1994 to expand protection for consumer-purpose borrowers who encumber their principal residence.
TILA’s Section 32 primarily addresses high-cost home mortgages providing a broad protective shield for homeowners. These high-cost mortgages are known as Section 32 mortgages.
In MLO practice, Section 32 mortgages are generally limited to second trust deeds originated by finance companies for funding consumer activities other than the purchase or construction of a home. Restrictions on Section 32 mortgage terms, the additional disclosures required and heavy penalties for violations make these mortgages unattractive to investors in Mortgage Backed Bonds (MBBs). Thus, high-yield junior financing is largely shunned by mortgage loan originators.
For MLOs to avoid offering Section 32 mortgages, acquiring knowledge of the terms triggering the designation of a high-cost mortgage as a Section 32 origination is part of mortgage originator training.
Section 32 Restrictions from firsttuesday on Vimeo.
The features of a Section 32 mortgage
Section 32 mortgage designation applies to consumer-purpose mortgages secured by a one-to-four unit residential property (or personal property) owned and occupied as the borrower’s or their family’s principal residence.
For instance, a mortgage secured by a houseboat used as the borrower’s principal residence may be designated a Section 32 loan. In contrast, a mortgage secured by a single family residence used as the borrower’s second home is not a Section 32 mortgage, since while the funding purchase is a consumer use, the security is not the borrower’s principal residence. [12 CFR §1026.32(a)(1)]
The following high-cost mortgages are exempt from Section 32 designation:
- reverse mortgages;
- construction mortgages which fund the initial construction of a new dwelling;
- mortgages originated and financed by a Housing Finance Agency; and
- U.S. Department of Agriculture (USDA) Rural Development Section 502 direct mortgages. [12 CFR §1026.32(a)(2)]
Thus, a consumer-purpose mortgage subject to Section 32 threshold analysis is secured by the borrower’s principal residence and funds the purchase, further improvement or remodel of the borrower’s principal residence, or the consolidation of consumer debt or home equity lines of credit (HELOCs). [12 CFR §1026.32(a)]
To determine whether the terms of a consumer-purpose debt which encumbers the borrower’s personal residence is a Section 32 mortgage, three threshold tests are applied to the financing:
- the mortgage’s annual percentage rate (APR);
- the points and fees paid in connection with the origination of the mortgage; and
- the prepayment penalties charged on the borrower’s payment of additional unscheduled principal to reduce debt or full satisfaction by premature payoff of the remaining principal.
A consumer mortgage with terms exceeding any one of the three threshold tests is classified as a Section 32 high-cost mortgage and subject to limitations, restrictions, and prohibitions. [12 CFR §1026.32(a)(1)]
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