Section 32 Loans

           Q.  Could you explain what a section 32 loan is?

A.  No problem.  Section 32 loans are defined by the Federal Trade

Commission (FTC) as high-rate, high fee loans for which it has established certain requirements.  They derive their name from the fact that the rules for these loans are contained in Section 32 of Regulation Z.  The rules for these loans apply to loans of $250,000 or less. These are essentially hard money loans.  (See Volume 3 issue 1 for a discussion on hard money loans).  A loan would fall into the section 32 category if:

  •      it is a first-lien loan and the annual percentage rate (APR) exceeds the rate on Treasury securities of comparable maturity by 8%.  The yield on a 30 year Treasury bond today is 4.73%. so if the APR exceeded 12.73% it would qualify as a Section 32 loan.
     

  •      it is a second-lien loan and the annual percentage rate (APR) exceeds the rate on Treasury securities of comparable maturity by 10%, 14.73% today.

  •      if the total fees and points payable by the consumer exceed the larger of $528 (for 2006) or 8% of the total loan amount.

Section 32 loans require that the borrower receive a number of disclosures at least 3 business days prior to the loan being finalized.  Among them are the APR, the regular payment amount, credit insurance premiums and balloon payments, if allowed.

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