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When we provide a HELOC, our loan origination system spits out an “Illinois Loan Product Choice Disclosure.” The form refers to 205 ILCS 635/5-8 and states that the customer has “been provided with an offer to accept a home loan product both with and without a prepayment penalty provision. . . .” If we do not currently provide a HELOC option without a prepayment penalty, do we need to start doing so? – IBA Compliance Connection

IBA Compliance Connection

Your go to source for compliance!

When we provide a HELOC, our loan origination system spits out an “Illinois Loan Product Choice Disclosure.” The form refers to 205 ILCS 635/5-8 and states that the customer has “been provided with an offer to accept a home loan product both with and without a prepayment penalty provision. . . .” If we do not currently provide a HELOC option without a prepayment penalty, do we need to start doing so?

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No, we do not believe that you are required to provide borrowers with an alternative loan that does not have a prepayment penalty when offering a home equity line of credit (HELOC) with a prepayment penalty. Neither Illinois nor federal law requires a HELOC to be offered with a non-prepayment-penalty option.

The Illinois law cited in the disclosure is the Residential Mortgage License Act of 1987, which does not directly apply to financial institutions. Section 1-3 states that the Act does not apply to an institution that is considered an “exempt person or entity.” 205 ILCS 635/1-3(a). The term “exempt person or entity” is defined to include “any bank, . . . savings bank, or credit union,” as well as their employees.  205 ILCS 635/1-4(d).

The Consumer Financial Protection Bureau (CFPB)’s new mortgage rules also would not apply. The CFPB’s rules do require that creditors offer an alternative loan without a prepayment penalty provision when offering a dwelling-secured loan with a prepayment penalty. 12 CFR 1026.43(g)(3). However, that provision does not apply to HELOCs. 12 CFR 1026.43(a)(1).