Topic: Home Equity Line of Credit (HELOC)
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We would like to waive our upfront costs for HELOC borrowers. However, some borrowers use the account as a short-term bridge loan and pay the loan off when their home sells, usually in the first year of the loan. Would we violate the Illinois Interest Act if we charge those waived costs on payoff of these loans?
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No, we do not believe you would be violating the Illinois Interest Act if you charge HELOC borrowers for waived, upfront costs on an early payoff, if agreed to in the loan agreement, but such charges could implicate the restrictions on prepayment penalties under Regulation Z and the Illinois High Risk Home Loan Act for…
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Our bank owns a service provider that charges a fee for processing our customers’ online loan payments. Should we disclose this fee in our HELOC account opening disclosures? What about for other types of loans? We also provide other reasonable means for a borrower to make a payment and not incur a fee.
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We do not believe that Regulation Z requires you to disclose an online payment fee in the account opening disclosures, but we recommend considering disclosing the fee due to the federal banking regulators’ increasing scrutiny of add-on fees like online payment and convenience fees. It may be possible to fully disclose an online payment fee…
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Can our bank charge prepayment penalties on all types of commercial loans? If allowed, can we include a demand clause as well? Are there any interest rate limits? Is any collateral prohibited?
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Commercial Loan Prepayment Penalties and Demand Clauses Yes, we believe you may charge prepayment penalties on all types of commercial loans. Regulation Z and the Illinois High Risk Home Loan Act impose restrictions on prepayment penalties for certain consumer loans, but these restrictions do not apply to commercial transactions. Similarly, we believe that you may…
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If we are considered a mortgage broker under Regulation X, can we charge a reasonable fee for ordering appraisals and title work, pulling credit reports, and submitting applications to the correspondent bank that will serve as the lender? Do we need to include anything about acting as a mortgage broker in our lending policy?
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Yes, we believe you can charge a reasonable fee for services you perform as a mortgage broker, including ordering appraisals and title work, pulling credit reports, and submitting loan applications to the correspondent bank. We are not aware of any requirement to include information related to acting as a mortgage broker in your lending policy…
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Are we allowed to charge a fee for releasing our lien after a borrower pays off their home equity line of credit (HELOC)? When we added a lien release fee to our documents, our loan document provider produced a “critical warning” stating that under Illinois law, the lender must pay all expenses to release a security interest in real estate when the security interest no longer secures any credit under a line of credit.
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Yes, we believe that Illinois law permits banks to charge HELOC lien release fees, provided your customers have agreed to pay such fees in the HELOC agreement and they have been properly disclosed under Regulation Z. Section 4.1 of Illinois’s Interest Act prohibits lenders from charging for “expenses, including recording fees and otherwise” when releasing…
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Are we required to begin distributing the CFPB’s updated HELOC brochure, or can we continue to distribute our backstock of the previous version until we run out?
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Yes, you may continue to distribute any copies you have of the previous version of the HELOC brochure until you run out. The CFPB’s “learn more” webpage provides that “creditors may, at their option, immediately begin using the revised HELOC brochure” or “may use earlier versions of the HELOC brochure until existing supplies are exhausted.”…
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Can we use a change in terms agreement to extend the term and increase the interest rate on a consumer balloon mortgage that is reaching maturity without the transaction being considered a refinancing? The interest rate is currently fixed and will continue to be fixed after the increase. Would the answer change if we extend and increase the interest rate after a consumer home equity line of credit (HELOC) has already matured? If allowed, what must be addressed or disclosed within the change in terms in addition to the new rate?
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Yes, we believe you may extend and increase the fixed interest rate on a consumer balloon mortgage without the transaction being considered a refinancing, provided that your modification agreement does not satisfy and replace the existing mortgage loan with a new transaction. Further, we do not believe this answer would change if you extend and…
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If we begin to offer FHA loans through our secondary market correspondent bank — with the correspondent bank funding the loans and closing the loans in its name — would we be considered a broker? We would order the appraisal and title work, pull credit reports, and submit the applications to the correspondent bank, which would make all decisions as to the application. If we are a broker, what compliance considerations do we need to be aware of?
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Yes, we believe you would be considered a mortgage broker in this scenario, which Regulation X defines as “a person (other than an employee of a lender) that renders origination services and serves as an intermediary between a borrower and a lender in a transaction involving a federally related mortgage loan.” Below is a non-exhaustive…
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We were advised not to renew a HELOC if the mortgage is twenty or more years old and that we should refinance instead. Does Illinois law specify when a mortgage securing future advances will expire? We have not found anything indicating that advances made after twenty years would not be secured by the mortgage.
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Yes, we believe that Illinois law imposes a twenty-year limitation on the security provided for future advances made under a mortgage securing a HELOC. The Illinois Banking Act provides that mortgages that secure revolving credit loans secure future advances only if “made within twenty years from the date thereof . . . .” A separate…
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We want to offer a HELOC with interest-only payments and no annual fees. Are there any restrictions on interest-only loans or other compliance issues that we should be aware of?
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No, we are not aware of any Illinois or federal law that would generally prohibit interest-only HELOCs, although you should be aware that such a HELOC may result in a prohibited balloon payment if the HELOC qualifies as a high-risk or high-cost mortgage. Subsection 4(1) of the Interest Act expressly permits savings banks to collect…