Topic: Home Equity Line of Credit (HELOC)
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When we renew a HELOC, we charge certain renewal-related loan fees that we classify as finance charges. What is the appropriate way to disclose these renewal-related loan fees on a periodic statement? If we treat the renewal as a new loan and issue a new “first” statement, our software would permit us to include the renewal-related fees as “start up” charges that we could add to the finance charge. However, if we treat the renewal as a continuation of the existing HELOC and issue a regular periodic statement, our software does not permit us to include the renewal-related loan fees as part of the finance charge. Our HELOC renewals typically involve extending the maturity date and adjusting the interest rate. We use Regulation Z’s “home secured” format for our periodic statements.
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We do not have enough information to determine exactly how to classify your “renewal-related” loan fees. However, if you include the fees as part of the finance charge, Regulation Z’s “home-secured” periodic statement rules require the fees to be itemized and identified on a periodic statement, regardless of whether it is the first periodic statement…
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Are there any limitations in Illinois on late fees for a home equity line of credit (HELOC) or for first or second lien real estate mortgages? Is there a required grace period before we can charge late fees?
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There are very few limitations on loan late fees under Illinois law, provided that your customers have agreed to such fees in the loan agreements. The Illinois Financial Services Development Act authorizes late fees on revolving credit plans (such as HELOCs) without any specific limit. Financial institutions may set the fee amount in their plan…
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An external auditor told us that the Illinois Interest Act prohibits us from charging loan release fees for home equity lines of credit (HELOCs), citing 815 ILCS 205/4.1. Is that true?
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We believe that Illinois law permits banks to charge HELOC lien release fees, provided that your customer has agreed to pay such fees on the HELOC agreement. Section 4.1 of the Interest Act appears to prohibit lenders from charging borrowers for “expenses, including recording fees and otherwise” when releasing a mortgage lien. However, the Illinois…
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A borrower has requested a home equity line of credit (HELOC) secured by a second mortgage. Can we pay off the first mortgage on the home with the HELOC funds at closing?
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Yes. We are unaware of any limitations on the use of HELOC funds to pay off a first mortgage.
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Our promissory notes for HELOCs and consumer installment loans indicate that payments made after 2:00 p.m. will be processed on the next day. Our residential mortgage notes do not have a cut-off time. Do we need to specify a cut-off time? If so, what would be a reasonable time? Should the cut-off time be included in the note, monthly statements, or somewhere else?
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No, you are not required to establish a cut-off time for processing consumer loan payments. However, if you do establish a cut-off time for when payments are received for HELOCs or closed-end residential mortgages, the time must be “reasonable.” By rule this means that for HELOCs your cut-off time cannot be before 5:00 p.m., and…
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In the application disclosures that we send to applicants for variable rate HELOCs, we disclose the lowest possible APR (an APR “floor”). But after we analyze the applicant’s creditworthiness, sometimes we have to raise the APR floor, resulting in a floor that is higher than the floor disclosed in our application disclosures. The application disclosures do specify that all of the disclosed terms are subject to change. Does it violate Regulation Z to change the final APR from the disclosed APR?
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No, Regulation Z would not prohibit a creditor from offering an APR floor that differs from the APR floor disclosed on the HELOC application disclosures, provided that this term was disclosed as being subject to change — and you have indicated that it was. Because the HELOC application disclosures are provided “at the time an…
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We originated a HELOC secured by the borrower’s primary residence. The same borrower also has an unsecured line of credit with us. The borrower recently passed away, and his home is being sold. We know that we can use the proceeds of the sale to pay off the HELOC, but can we also use the sale proceeds to pay off the unsecured line of credit? The unsecured line of credit agreement does not contain any setoff provisions, and the HELOC agreement does not contain a cross-collateralization clause. Also, while we already include cross-collateralization clauses in secured commercial loans, can we add these provisions to all secured consumer loans going forward? Would such a clause permit us to use the collateral to cover future unsecured loans?
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No, we do not believe that you can use the proceeds of the home sale to pay off the unsecured line of credit. However, you may have a right of setoff with respect to accounts or other monies the customer has at your bank. We note, though, that our guidance is based on your reading…
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Are we required to provide a notice of the right to choose a title insurance company to applicants for dwelling-secured home equity lines of credit (HELOCs)? Depending on the HELOC amount, a borrower will be required to pay for a title search, a limited title insurance policy, or a full title insurance policy.
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We recommend providing a notice of the right to choose a title insurance company to all HELOC applicants who will be required to pay for title insurance, as defined in the Title Insurance Act. Under the Title Insurance Act, when a borrower is required to pay for title insurance for a loan secured by the…
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We have a matured HELOC that we want to extend. We pulled a flood determination and discovered the property now is in a special flood hazard area, although it wasn’t when we originally made the HELOC. The community where the property is located does not participate in the National Flood Insurance Program (NFIP). We are exploring private insurance but cannot find a policy that covers the full amount of the loan. Is the borrower required to obtain flood insurance if their community doesn’t participate in the NFIP?
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No, the borrower is not required to obtain flood insurance when the home securing the loan is located in a special flood hazard area in a community that does not participate in the NFIP. Under the FDIC flood insurance regulations, a lender may not make, increase, extend, or renew any “designated loan” unless the building…
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We require all mortgage loan applicants to complete and sign an Illinois Civil Union and Same-Sex Marriage Addendum to the Uniform Residential Loan Application (URLA) form. Is the addendum form still required in Illinois? If so, should we also provide it to HELOC applicants?
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The addendum is not required, but we believe using such a form could help your bank to determine whether applicants have entered into a civil union for HELOCs as well as closed-end mortgage loan applications. Illinois law offers members of a civil union the same protections and benefits as married couples. Consequently, it is helpful…