We have home equity lines of credit (HELOCs) maturing this year, and we are allowing the borrowers to renew for another draw period. We will charge modification fees that include charges for a flood determination, a credit report, and document preparation. The borrowers will have the option of paying these fees upfront in cash or by drawing on the HELOC. How should these fees be reflected on the initial periodic statement for each option the borrower may choose? We use the home-secured format for our HELOC periodic statements.

Feb 19, 2019

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We believe you are required to disclose these modification fees for the HELOC on the initial periodic statement as charges other than finance charges, whether your customer pays these fees with cash or with funds drawn on the line of credit. Although Regulation Z exempts finance charges that qualify as “start-up fees” from inclusion on the initial periodic statement when they are paid prior to the issuance of the initial statement and not financed as part of the plan, we do not believe these modification fees are finance charges, so they do not qualify as “start-up fees.” However, we are checking with the CFPB to see if they agree with this assessment.

Creditors using Regulation Z’s “home-secured” periodic statement generally must itemize and identify the components of any finance charge added to the account during the billing cycle, as well as any other charges that do not qualify as finance charges. Finance charges that are “start-up fees,” which include “points, loan fees, and similar finance charges relating to the opening of the account,” do not need to be disclosed on the first periodic statement if they are paid prior to the issuance of the first statement and are not financed as part of the plan. When these “start-up fees” are financed as part of the plan, they must be disclosed on the first periodic statement.

However, these special rules for start-up fees do not apply to the modification fees mentioned in your question, as those fees are not finance charges. Fees for a flood determination, credit report, and document preparation are excluded from the finance charge in transactions secured by real property when they are imposed “solely in connection with the initial decision to grant credit.” In our view, these modification fees are being imposed solely in connection with the initial decision to grant credit by renewing the HELOCs for another draw period. Thus, assuming your modification fees are reasonable, we do not believe they are “finance charges,” and they would not be exempt “start-up fees” if your customer pays them with funds not drawn on the line of credit.

Consequently, we recommend disclosing all three modification fees on the initial periodic statement with any other charges that do not qualify as finance charges. However, as noted above, we are waiting for confirmation of this assessment from the CFPB.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.7(a)(6)(i) (“The creditor shall furnish the consumer with a periodic statement that discloses the following items, to the extent applicable: (a) Rules affecting home-equity plans. . . . (6)(i) The amount of any finance charge debited or added to the account during the billing cycle, using the term finance charge. The components of the finance charge shall be individually itemized and identified to show the amount(s) due to the application of any periodic rates and the amounts(s) of any other type of finance charge. . . .”)

Regulation Z, 12 CFR 1026.7(a)(6)(ii) (“The creditor shall furnish the consumer with a periodic statement that discloses the following items, to the extent applicable: (a) Rules affecting home-equity plans. . . . (6)(ii) The amounts, itemized and identified by type, of any charges other than finance charges debited to the account during the billing cycle.”)

Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 7(a)(6)(i), Comment 8 (“Start-up fees. Points, loan fees, and similar finance charges relating to the opening of the account that are paid prior to the issuance of the first periodic statement need not be disclosed on the periodic statement. If, however, these charges are financed as part of the plan, including charges that are paid out of the first advance, the charges must be disclosed as part of the finance charge on the first periodic statement. However, they need not be factored into the annual percentage rate. (See § 1026.14(c)(3).)”)

Regulation Z, 12 CFR 1026.4(c)(7) (“The following charges are not finance charges: . . . The following fees in a transaction secured by real property or in a residential mortgage transaction, if the fees are bona fide and reasonable in amount: . . . (ii) Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents. . . . (iii) Notary and credit-report fees . . . (iv) Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest-infestation or flood-hazard determinations. . . .”)

Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 4(c)(7), Comment 3 (“Real estate or residential mortgage transaction charges excluded under § 1026.4(c)(7) are those charges imposed solely in connection with the initial decision to grant credit. This would include, for example, a fee to search for tax liens on the property or to determine if flood insurance is required. The exclusion does not apply to fees for services to be performed periodically during the loan term, regardless of when the fee is collected. For example, a fee for one or more determinations during the loan term of the current tax-lien status or flood-insurance requirements is a finance charge, regardless of whether the fee is imposed at closing, or when the service is performed. If a creditor is uncertain about what portion of a fee to be paid at consummation or loan closing is related to the initial decision to grant credit, the entire fee may be treated as a finance charge.”)