Does the Illinois High Risk Home Loan Act cover HELOCs? And, if multiple interest rates could apply throughout the life of a HELOC, which rate should be used for purposes of determining whether a loan exceeds the APR thresholds in the Act?

The Illinois High Risk Home Loan Act (the “Act”) presently excludes all “open-end credit plans” as defined by Regulation Z in the year 2000. 815 ILCS 137/10. That definition covers “consumer credit extended by a creditor under a plan in which: (i) The creditor reasonably contemplates repeated transactions; (ii) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and (iii) The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.” 12 CFR 226.2(a)(20). (The current version of the definition, which has not changed, can be found at 12 CFR 1026.2(a)(20)).

At this time (see below), a revolving HELOC would be considered an excluded “open-end credit plan” under the High Risk Home Loan Act. However, a non-revolving HELOC (a closed-end line of credit) would not be considered an open-end credit plan eligible for the Act’s exclusion. If you are dealing with a closed-end HELOC, you will need to compare the loan’s annual percentage rate (APR) to the Act’s interest rate triggers. However, the Act does not define the term “annual percentage rate”; rather, it simply refers to the loan’s APR “at the time of origination.” See 815 ILCS 137/10. A conservative approach for avoiding the application of the Act would be to ensure that any APR that could apply to the borrower during the term of the loan agreement below the Act’s APR thresholds (whether the initial rate when the line is granted, or any rate during the draw period, or the rate after the draw and during the repayment period).

Importantly, note that the Illinois law will soon cover all residential mortgages, whether open-end or closed-end (which reflects a similar broadening of the scope of HOEPA high-cost mortgages at the federal level). Public Act 97-849 expanded the definition of “high risk home loan” from applying only to “home equity loans” to any “consumer credit transaction . . . that is secured by the consumer’s principal dwelling.” This change will go into effect at the same time as the new HOEPA regulations, which are currently scheduled to go into effect on January 10, 2014.