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Truth in Lending: 8.3.3 Duties of Third Parties

Third-party originators (e.g., mortgage brokers) often provide HELOC applications to consumers and must provide the HELOC brochure.126 But, they need only provide the early HELOC disclosures if the creditor has provided the originator with the disclosures.127

Truth in Lending: 8.3.4.1 General

Regulation Z lists the information to be given to consumers when they receive an application for a HELOC plan.132 Information need be provided only to the extent applicable. For example, if negative amortization cannot occur in a program, no mention of it need be made.

Truth in Lending: 8.3.4.2 Retention of Information

If the disclosures are not in a form the consumer may keep (e.g., if the disclosures are printed on an application form the consumer must return), the creditor must advise the consumer to make and retain a copy of the disclosures.135

Truth in Lending: 8.3.4.3 Conditions for Disclosed Terms

Creditors must include a clear and conspicuous statement of any deadline for submitting an application to obtain specific, disclosed terms.136 Creditors need not guarantee any terms, in which case they must indicate that all of the terms are subject to change and no time to submit the application need be given. If creditors choose to guarantee only some of the terms, they must indicate which terms may change prior to opening the plan.

Truth in Lending: 8.3.4.6.1 General

Creditors are required to describe the payment terms of the plan, including the length of the draw period and any repayment period (but not the combined length of the draw period and any repayment period).144 If the length of either is indefinite, creditors should state that fact. If a creditor retains the right at the end of the specified draw period to determine whether to renew or extend the original draw period, such provisions should be ignored for purposes of the disclosures.145

Truth in Lending: 8.3.4.6.2 Balloon payments

Any possible balloon payment must be disclosed.151 Regulation Z states that “[a] balloon payment results if paying the minimum periodic payments does not fully amortize the outstanding balance by a specified date or time, and the consumer must repay the entire outstanding balance at such time.”152 The official interpretations say a final payment is not a balloon payment unless it is more than twice the amount of other minimum payments under the plan.153

Truth in Lending: 8.3.4.6.3 Multiple payment option disclosures

In plans that have multiple payment options within the draw period or within any repayment period, creditors may provide representative examples as an alternative to providing examples for each payment option. For purposes of this disclosure, as well as for the variable rate disclosures,155 the official interpretations describe three categories of payment options:156

Truth in Lending: 8.3.4.6.4 Negative amortization

If negative amortization may occur under the plan, the creditor must say so and explain that negative amortization will increase the principal balance and reduce the consumer’s equity in the dwelling.158 Negative amortization generally occurs when minimum periodic payments do not fully cover interest that has accrued since the last payment, thereby increasing the principal balance.

Truth in Lending: 8.3.4.6.5 Reverse mortgages

Open-end reverse mortgages secured by the consumer’s dwelling are subject to the HELOC rules.160 Reverse mortgages typically only require repayment when certain events occur, such as the homeowner’s death. The payment disclosures will reflect that a single payment is due when one of the specified events happens.161 The single payment may be considered the “minimum periodic payment” and not a balloon payment. The creditor must disclose an example of the minimum periodic payment.

Truth in Lending: 8.3.4.7 Annual Percentage Rate

Regulation Z § 1026.40(d)(6) provides that a recent APR will be provided.164 For fixed rate plans, a recent APR is one that has been in effect under the plan within the twelve months prior to the date the disclosures are provided to the consumer. For variable rate plans, a recent APR is the most recent index value and margin provided in the historical table or a more recent rate.165

Truth in Lending: 8.3.4.8.1 Generally

Creditors must provide a description and the amount charged to open, use, and maintain the account, and a statement of when the consumer must pay the charges.169 These charges include items such as application fees, points, annual fees, transaction fees, and fees imposed when the plan converts to a repayment phase (if the conversion is provided for in the original agreement).

Truth in Lending: 8.3.4.8.2 Fees charged upon account termination

The creditor must disclose whether it charges a fee or penalty if the creditor terminates the plan prior to normal expiration.175 The disclosure is not required for fees imposed when the plan expires in accordance with the agreement or when the consumer terminates early.176 The actual amount of such fees need not be provided.

Truth in Lending: 8.3.4.9 Fees Imposed by Third Parties to Open a Plan

HELOCs are exempt from RESPA’s good-faith estimate requirement179 and TILA’s comparable requirement for closed-end mortgages.180 Instead, Regulation Z requires that the early disclosures include a good faith estimate of the total fees imposed by third parties to open the account, stated as a single dollar amount or a reasonable range,181 listing charges such as appraisal, credit report, government agency and attorney fees.

Truth in Lending: 8.3.4.10 Credit Limits

Creditors are required to state any limitations on the number of extensions or amount of credit that can be obtained during any time period, and any minimum draw or minimum outstanding balance requirement stated as a dollar amount or as a percentage.186 A limit on automatic teller usage need not be disclosed unless this is the only method by which the consumer can get funds.187 Creditors need not disclose the maximum credit limit.

Truth in Lending: 8.3.4.11 Tax Implications

Consumers must be told to consult a tax advisor regarding the deductibility of interest and charges under the plan.188 When an extension of credit from the HELOC exceeds the fair market value of the dwelling, the creditor must tell the consumer that the interest on that portion of the credit extension which exceeds the fair market value of the home is not tax-deductible for federal income tax purposes.189

Truth in Lending: 8.3.4.12 Disclosures for Variable Rate Plans

Creditors must provide information about any variable rate feature contained in a plan.190 Many of these disclosures are similar to the disclosures currently required for closed-end variable rate transactions secured by a consumer’s principal dwelling.191 Information must be provided as to variable rate features of both the draw period and any period in which repayment occurs with no further ability to obtain advances.

Truth in Lending: 8.4.1 General

In addition to the early disclosures given with an application,232 creditors must also provide disclosures at the time a home equity line of credit (HELOC) plan is opened,233 before the first transaction.234 Creditors are subject to statutory liability if any of the essential disclosures are not made properly, when applicable.235

Truth in Lending: 8.4.2.1 Disclosure of the Finance Charge Accrual Date

The account-opening disclosure must contain a statement of when finance charges begin to accrue.241 This may be a general statement that refers, for example, to a time period that the consumer can figure out from other information, instead of a particular date.242 Creditors may choose to say finance charges begin to accrue thirty days from the close of the billing cycle or may reference the date on which the billing cycle starts, if it is a fixed date (i.e., a first-of-the-month billing cycle).

Truth in Lending: 8.4.2.3 Disclosure of the Balance Method

The creditor must explain in the initial disclosures the method of determining the balance on which the finance charge is to be computed.261 This explanation must be more detailed than the shorthand phrases the CFPB allows on applications and solicitations.262

Truth in Lending: 8.4.2.4 Determination of the Amount of the Finance Charge

The account-opening disclosures must explain how the dollar amount of any finance charge will be determined.271 Stating that the amount of the finance charge is determined by applying a periodic rate of, for example, 1.5% per month to the average daily balance is sufficient. This information should be clear enough to enable the consumer to verify the creditor’s figures. A creditor may refrain from imposing a finance charge on small balances. This practice need not be disclosed.272

Truth in Lending: 8.4.3.1 General

Some (but not all) non-finance charges must also be disclosed. The Regulation and official interpretations create a bizarre structure, mandating the disclosure of finance charges and “other charges,” while specifically exempting some charges from disclosure.