Home Equity LOC Q&A

Last Update: December 1, 2008

Late Charges

Q. Does this $15 cap on late charges apply only to HELOC? On closed-end Home Equity, can we charge 5% with a $20 cap?

A. The $15 cap ONLY applies if you are using chapter 346. [Remember that you could elect out of chapter 346.] Under chapter 342, the late charge is 5% after 10 days (no cap). Manufactured housing loans have a cap--but not second mortgage liens on conventional housing.

50% Cap

Q. We’re confused on the amount available to borrow on HELOC. Is it 50% of the appraised value, 50% on the 80%, or 50% of the available equity? Please complete.

A. FMV           $100,000  
    80%          $ 80,000  
    1st lien -   $ 20,000  
                     $60,000 available HEL
                     $50,000 available HELOC

This chart is taking a conservative approach to the FMV caps.  The interpretations from the Finance Commission would allow the first draw to be 80%.  Then no additional draws could occur until the balance drops to 50% with the second draw.  In other words, no revolving unless the draws are capped at 50%. 

Forms

Q. Do you know of a vendor who has the new docs? I.e. note, Notice Concerning Extensions of Credit, HEL Booklet.

A. Here is a link to the Fed booklet.

Variable Rate

Q. Do you know where we can get variable interest rate disclosures?

A. See the model forms in Reg Z , Appendix G for open end transactions. Here is a link. Go to the end of the regs for the model forms.

Q. Are HELOC’s going to be capped as traditional ARM’s are?

A. Yes. 12 USC 3806 requires a cap on any ARM.


Cure

Q. Given that the procedures to cure a mistake are now in place, do they apply to any home equity loans that we might have made before the home equity amendment/law goes into effect? For example, if I made a home equity loan before the new law went into effect and the customer now finds a defect in the documents, can I correct that mistake under the new law?

A. Yes. The timing will depend on when the customer finds the defect. Under prior law, you could cure, but the exact procedures were not spelled out!

Q. Also, do the bank’s rights to cure have to be spelled out in the loan documents or do they stand as law without notice to the customer?

A. The procedures are "law" and so do not need to be spelled out. However, I believe that most of the forms at least reference the existence of cure rights. That is important so that the customer knows that he/she needs to give the bank 60 days advance notice of any defect. Currently, the forms may merely reference a "reasonable" time--the current law. I expect that the forms will be revised.


Revolvers

Q. It is my understanding that the lines of credit can either be true revolvers for a period of time or a closed end line that can be advanced up only once. Is that correct?

A. I don’t think it is that limited. In other words, you could have a revolving line that has a draw period, during which advances can be made and paid back and re-advanced. OR, you could have an "advancing" line through which the customer makes a series of draws.


HMDA

Q. For purposes of HMDA, if a customer establishes a HELOC for lets say " the heck of it", will it be our responsibility to determine the purpose of all future advance requests and log those that would have HMDA implication?

A. No. You have a choice on HELOCs with regard to determining purpose of advances. But be consistent. Here is a link to a superb training program on HMDA.


Advances

Q. Must a home equity line of credit (HELOC) have a set draw period and a set repayment period?

A. Since amortizing payments are required at the end of the draw period, I believe that you must have a specified draw period (term of years or "when fully extended") and a set repayment period.

Q. Must the first payment occur two months after the extension of credit, which means that the first draw needs to occur within that period of time?

A. The Finance Commission adopted an official interpretation that indicates that payments begin after the first draw.  So if there are no draws within the first two months, there are no payments either.

Q. There are no restrictions on the length of time for the draw period or the repayment period, but they both must exist. So, could you have a 5-year HELOC with a draw period of 2 years and a repayment period of 3 years, or these periods of time could be reversed? If this is the case, I suppose that you would not want to raise suspicion by having a draw period of 4½ years and a repayment period of 6 months.

A. Correct. The law does not specify any limitations on the periods.

Q. During the draw period, payments may be interest only but must be made at least monthly and no more often than every 14 days.

A. Correct. However, the bank could also require payments that at least covered the accrued interest plus a principal reduction of ____% or a fixed amount. That would be at your discretion.

Q. During the repayment period, the line converts to a closed-end transaction with substantially equal payments to be made monthly but no more frequently than every 14 days.

A. Correct.

Q. Can you have different rate structures for the draw period and the repayment period?

A. Since you can have a variable rate of interest, I don’t see why you couldn’t have two different rates. But it may be more practical to simply have a variable rate transaction tied to a rate other than your base or prime.

One Loan Rule

Q. Can a customer have a closed-end HE and an open-end HELOC at the same time?

A. No. Only one home equity loan at a time. It can be EITHER closed end or open--but only one!

Q. If the customer wants to convert their HE to a HELOC, how is the line amount calculated?

A. First, the 80% cap applies. So you need to see how much other debt there is. However, the HELOC is also subject to a 50% of FMV (measured at time line is put in place).

Advance Requests

Q. When requesting an advance on the HELOC, can either party (husband/wife) request advances or do both have to agree with the request?

A. The Finance Commission interpretations indicate that either spouse may request a draw.  The Commission strongly recommends that the parties deal with this issue in the docs.

Settlement Statement

Q. With regard to the one-day delivery of the HUD statement before closing, does the customer have to come into the financial institution, title company, or attorney’s office to sign for the delivery of the document?

A. Don’t know. I have asked for clarification. This is NOT addressed in the first set of interpretations. I would recommend that you obtain an agreement up front from the borrower regarding how the delivery shall be accomplished. For example, you could deliver by courier, by requiring the borrower to pick up the statement, by email or by fax. I hope that we can get an interpretation providing that if the notice is mailed at least three days prior to the day before closing, we can presume compliance. For NOW use ACTUAL delivery by courier, fax or email that is acknowledged, or personal pick up.

Q. Can the customer waive the right to receive the settlement statement one day prior to closing?

A. The law permits a waiver for "bona fide emergency or another good cause." The lender must obtain the written consent of the owner. But, given the history of Truth in Lending waivers of right to rescind, I just don’t like waivers! Use sparingly.

Q. Does this rule apply to closed-end loans?

A. Yes.