High Rate/High Fee Loans and HELOCs

California law provides certain consumer protections in transactions where borrowers are paying high interest rates and/or loan fees to obtain loans on their primary residences. The law contains special rules regarding balloon payments, prepayment penalties, the borrower's ability to repay the loan and many others. With certain exceptions, a "covered loan" is a consumer credit transaction that is secured by a one to four unit dwelling that is or intended to be the borrower's principal residence and where the annual percentage rate (APR) exceeds by 8 points or more the yield on Treasury Securities having a similar term, or the total points and fees, as defined, payable by the consumer at or before closing will exceed 6 percent of the total loan amount. The maximum amount covered is the most current FannieMae single-family first mortgage conforming loan limit.

Open end credit transactions, sometimes known as "home-equity lines of credit" (HELOCs) are not covered by this law. Be wary of a broker or lender who attempts to steer you into obtaining a HELOC if it is not your intention to obtain one. He or she may be attempting to evade the law. The loan may contain terms such as default interest rates that would not be allowed with a "covered loan" and could end up costing you substantially more to repay. A broker has a responsibility to you as your agent to discuss all possible loan options with you and inform you of the advantages and disadvantages of each. You should not be pressured into applying for a loan that is not suitable for your needs or ability to pay.

Information about predatory lending practices can be found in our "Featured Items" under "Predatory Lending Prevention" and in our booklet, entitled "Using the Services of a Mortgage Broker" in the Publications Section of this Web site.