HOEPA Loan Proceeds

Question: We are a lender that originated a HOEPA loan. We were asked if we could make a payment to a contractor under a home improvement contract from HOEPA proceeds. Is that permissible?

Answer
A creditor may not pay a contractor under a home improvement contract from the proceeds of a HOEPA loan, other than:

1. By an instrument payable to the consumer or jointly to the consumer and the contractor (and if there are multiple consumers who are primarily liable each must be named as payee); or

2.  At the election of the consumer, through a third-party escrow agent in accordance with the terms established in a written agreement signed by the consumer, the creditor, and the contractor prior to disbursement. [12 CFR § 226.34(a)(I); 12 CFR Supp. I to part 226 – Official Staff Commentary §226.34(a)(I)(i)-I]

Jonathan Foxx is president and managing director of Lenders Compliance Group, Brokers Compliance Group, Servicers Compliance Group and Vendors Compliance Group, national companies devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted by phone at (516) 442-3456, by e-mail at [email protected] or visit www.LendersComplianceGroup.com.