Topic: Home Equity Line of Credit (HELOC)
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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.
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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…
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After a HELOC has matured, can we extend the customer a temporary closed-end loan for a period of twelve months or less, and then modify the temporary loan into a longer-term balloon loan (typically for a term of 3–5 years), thus avoiding the requirement of an ability-to-repay (ATR) analysis?
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While it may be possible to avoid Regulation Z’s ability-to-repay (ATR) requirements when making an initial temporary (“bridge”) loan and subsequently modifying it with a term longer than twelve months, we recommend proceeding with caution. The modification of the bridge loan into a balloon loan must be structured carefully to not be considered a “refinancing,”…
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Can we attach a HELOC to a customer’s pre-existing demand deposit account so that the customer can use their debit card to access the HELOC funds?
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Yes, we believe your bank may attach a home equity line of credit (HELOC) to a deposit account to enable your customers to access HELOC funds with a debit card. We are not aware of any Illinois or federal law that would prohibit this practice. For example, Regulation E recognizes that a home equity line…
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We currently offer agricultural operating lines of credit. We are considering offering a credit line check (similar to a HELOC check) on these lines. Can we offer checks for the customer to access the funds from these lines?
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We are not aware of any limitations on offering checks (sometimes known as “drafts”) drawn on a line of credit issued for agricultural purposes. Additionally, because the credit lines are issued for agricultural purposes, we do not believe that Regulation Z’s disclosure requirements will apply. For resources related to our guidance, please see: Regulation Z,…
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I have a question about increasing the post maturity rate on a home equity line of credit (HELOC). I have seen the term “default rate” referenced in relation to increasing a HELOC’s rate when the loan is “terminated” or “accelerated.” When a HELOC is terminated or accelerated, does that mean it has matured? We would like to impose a post-maturity interest rate increase, but we will not impose a default rate during the loan term. Is that permissible?
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Yes, we believe that your bank may impose an increased post-maturity rate for HELOCs that have matured, provided that your customers have agreed to the increase in their loan agreements. The terms “default rate,” “terminated,” “accelerated,” and the imposition of interest rate increases all should be defined by your bank’s HELOC loan agreement. Typically, the…
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Can you modify credit from open-end to closed-end without it being considered a refinance, which would trigger an ability-to-repay (ATR) analysis? When a HELOC has matured, we extend a one-year renewal and provide closed-end disclosures, after which we modify the HELOC into a closed-end balloon loan, without new disclosures. If the HELOC has not yet matured, we extend a renewal (either one year or multiple years with a balloon payment) and do not provide new disclosures. However, in either case, we do not perform an ATR analysis. Is this correct?
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No, we do not believe a HELOC can be converted after maturity into a closed-end loan as a modification; such a conversion would be considered a refinancing and require an ATR analysis. However, we do believe a HELOC can be converted to a closed-end loan prior to maturity as a modification, which would not trigger…
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We originated a home equity line of credit (HELOC) for the property owner. The borrower’s wife signed only the homestead waiver portion of the mortgage, since she does not hold title to the home securing the HELOC. Our loan software produced a right of rescission form for the husband but not for the wife. Shouldn’t the wife sign a right of rescission form as well?
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No, the wife is not entitled to the right of rescission because she is not an owner of the property securing the HELOC. The right of rescission applies only to persons with an ownership interest in the mortgaged property, and it does not apply to those with “leaseholds or inchoate rights, such as dower.” While…
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What is the maximum interest rate allowed on a home equity line of credit (HELOC) in Illinois?
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There are very few limitations on interest rates charged by banks under Illinois law for HELOCs. The Illinois Banking Act permits banks to charge any “interest, fees, and other charges . . . subject only to the provisions of [subsection 4(1)] of the Interest Act” and any laws applicable to “credit secured by residential real…
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Our new loan origination software requires us to assign one Illinois law to each type of loan to help the software identify the permissible interest rate for the loan product. For consumer non-real estate loans, should we assign the Interest Act or the Consumer Installment Loan Act? For home equity lines of credit (HELOCs), should we assign the Interest Act or the Financial Services Development Act? Also, does the Interest Act permit us to charge commercial real estate borrowers a fee for real estate valuations completed by a bank staff member?
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We are hesitant to answer your question to the extent that it might imply we believe attributing a single law to a loan type, even if only with respect to interest rates, constitutes a best practice (or even an acceptable practice in some circumstances). Having said that, the Consumer Installment Loan Act does not apply…
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We are a HMDA reporter but have not reported open lines of credit in the past, and we are exempt from reporting in 2018 (we do not meet the 500 loan threshold for open-end lines of credit). Under Regulation B, can we collect government monitoring information (GMI) for open-end home purchase loans and refinances?
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Yes, Regulation B permits (and actually requires) lenders to collect an applicant’s GMI — ethnicity, race, sex, age, and marital status — open-end home purchase loans or refinancings, provided that they are to be secured by the applicant’s principal residence. In general, Regulation B prohibits lenders from collecting certain personal information from applicants, including ethnicity,…