We believe that the bank should be able to structure its HELOCs so that they convert to a closed-end loan at the end of the draw period, though this would require closed-end disclosures at the time of conversion.

We spoke to a senior counsel at the CFPB about this issue. She discussed the issue with a colleague and said that they believe a bank could structure a transaction into two separate loans: an open-ended HELOC (for the draw period) and a closed-end loan (for the repayment period). This would allow the bank to avoid the periodic statement requirement during the repayment period. But, the bank would have to provide closed-end disclosures at the time that the loan converted from a HELOC to a closed-end loan, as explained in the rule commentary (Official Staff Commentary, 12 CFR 1026.17(b), Comment 2):

Except for home equity plans subject to § 1026.40 in which the agreement provides for a repayment phase, if an open-end credit account is converted to a closed-end transaction under a written agreement with the consumer, the creditor must provide a set of closed-end credit disclosures before consummation of the closed-end transaction. . . . If consummation of the closed-end transaction occurs at the same time as the consumer enters into the open-end agreement, the closed-end credit disclosures may be given at the time of conversion.

This comment makes a distinction between an open-end credit agreement that “provides for a repayment phase” and an open-end account that is “converted to a closed-end transaction under a written agreement.” The CFPB counsel acknowledged that this may seem like a distinction without a difference, but she said that the distinction would depend on how the documents are structured. One major difference is that a HELOC that converts to a closed-send transaction would require two separate agreements (and separate disclosures at the time of the conversion): one for the open-end draw period and one for the closed-end repayment. We recommend consulting with bank counsel to determine the exact form of the agreements.