This article examines the ten prohibited lender actions which protect the borrower after origination of a high-cost (Section 32) consumer-purpose mortgage. For more information, see Section 32 mortgage restrictions.

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Restricted conduct after origination

After a Section 32 high-cost mortgage is originated, the mortgage holder’s disbursements, servicing and modification activities are restricted, prohibiting conduct such as:

  • disbursing mortgage funds to home improvement contractors;
  • selling or pledging a Section 32 mortgage;
  • refinancing a Section 32 mortgage within one year;
  • analyzing the borrower’s ability to repay;
  • counseling the borrower;
  • recommending default in payments;
  • charging modification and deferral fees;
  • imposing late payment fees;
  • providing payoff statements; and
  • financing of points and fees. [12 Code of Federal Regulations §1026.34(a)]

Home improvement construction disbursements

A mortgage lender originating a Section 32 mortgage to fund construction of the borrower’s home improvements may not disburse the loan proceeds directly to the contractor, but may disburse the funds:

  • to the borrower;
  • jointly to both the borrower and the contractor; or
  • to a third-party escrow agent as a builder’s control service under a written agreement signed by the borrower, lender and contractor. [12 CFR §1026.34(a)(1)] 

Notice to assignees on sale or pledge of mortgage

A lender assigning a Section 32 mortgage in a sale or pledge of the mortgage will provide the assignee acquiring the mortgage with the following statement:

“Notice: This is a mortgage subject to special rules under the Federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for claims and defenses with respect to the mortgage that the borrower could assert against the creditor.”

This notice must be prominent, best displayed as a stamp on the face of the note. [12 CFR §1026.34(a)(2); Official Interpretation of 12 CFR §1026.34(a)(2)-2]


A lender originating a Section 32 mortgage, and their assignee, are prohibited from refinancing the mortgage by rolling it over into another Section 32 mortgage within one year of its closing, unless the refinancing arrangements are in the borrower’s best interest, i.e., the mortgage is needed to meet the borrower’s bona fide financial emergency. [12 CFR §1026.34(a)(3)]

Ability to repay

Arguably the borrower’s ability to repay the mortgage is the most important restriction a lender originating a Section 32 mortgage must comply with. This rule put an end to the use of “no-doc” and “low-doc” mortgage originations.

The lender originating a Section 32 mortgage must verify the borrower is able to repay the mortgage based on the borrower’s current and expected income, employment, current debts and mortgage-related obligations, and assets other than the borrower’ home securing the Section 32 mortgage. [12 CFR §1026.34(a)(4)]

Mortgage-related obligations weighing on the borrower’s ability to repay include:

  • property taxes;
  • mortgage insurance (PMI) premiums; and
  • homeowners’ association (HOA) fees. [12 CFR §1026.34(a)(4)(i); Official Interpretation of 12 CFR§1026.34(a)(4)(i)]

Related article:

Mortgage Concepts: Is it a Section 32 loan?

Recommending default

A lender refinancing an existing Section 32 mortgage may not recommend or encourage a default on the Section 32 mortgage they are refinancing. This conduct adversely affects the borrower’s credit rating and thus increases the interest rate the lender can justify on new financing. [12 CFR §1026.34(a)(6); Official Interpretation of 12 CFR §1026.34(a)(6)]

Modification fees

A lender, successor in interest, or an agent may not charge the borrower any fee to modify, renew or extend, defer payment, or amend a Section 32 mortgage. These services are all covered by the fee the lender or servicer receives for managing the mortgage payments. [12 CFR §1026.34(a)(7)]

Late fees

Lenders are required to include accurate information — not “guesstimates” — on late payment charges in their Loan Estimates disclosures, such as:

  • the dollar amount or percentage charge of the late payment amount; and
  • the number of days the payment needs to be late to trigger the late payment fee. [12 CFR §1026.37(m)(4)]

Once originated, Lenders and assignees servicing a Section 32 mortgage are limited in the late fees they may impose, such as:

  • the note documenting the debt must authorizes a late fee in its provisions;
  • the late fee is an amount less than 4% of the amount of the past due payment;
  • the late fee is incurred after 15-days beginning on the date the payment is due, or 30 days when interest is paid in advance;
  • the late fee is charged only once on each delinquent payment, not repetitively  for every month the payment remains unpaid; and
  • no late fee may be charged on a previous late fee, a practice called pyramiding.

A payment received is to be applied to the monthly payment due in the month the payment is received and may not be first applied to delinquent payments. Thus, the payment received is for the current payment due and the lender may not impose an additional late fee for the unpaid payments remaining delinquent. [12 CFR §1026.34(a)(8)(iv)]

Payoff statements

A lender, assignee or servicer may not charge a fee for informing a borrower of the balance due on a Section 32 mortgage. [12 CFR §1026.34(a)(9)(i)]

However, when payoff information is delivered by fax or courier, the lender may charge a reasonable transmission fee for the fax or courier service. Before a transmission fee may be charged, the lender must inform the borrower that the payoff balance information is available at no charge. [12 CFR §1026.34(a)(9)(ii)]

When the lender has provided a borrower with payoff balance information four or more times in one year, they may charge a reasonable fee for further requests by the borrower. [12 CFR §1026.34(a)(9)(iv)]

Payoff balances must be provided within five business days after the request is received. [12 CFR §1026.34(a)(9)(v)]

Financing of fees

A lender refinancing a Section 32 mortgage they hold may not in any way finance:

  • a prepayment or penalty fee on the payoff of the Section 32 mortgage; or
  • any points or fees for the refinancing. [12 CFR §1026.34(a)(10)]

Related article:

Section 32 restrictions on mortgage note provisions