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Truth in Lending: 8.2.1 Introduction

Creditors offering home equity lines of credit (HELOCs) must comply with all standard TILA provisions for advertising open-end credit.44 There are also special requirements for advertising HELOCs.45 Significant changes in the advertising rules took effect in 2009.46 Note, however, that TILA provides no private remedy for violations of its advertising rules.47 Nevertheless, it

Truth in Lending: 8.2.2 Trigger for HELOC Advertising Disclosures

Generally, the HELOC advertising requirements are triggered by any reference in a HELOC advertisement to payment terms (including the length of the plan, how the minimum payments are determined, and the timing of such payments) or by any reference to finance charges, APRs, or other charges (i.e., terms required to be disclosed in the account-opening disclosures under sections 1026.6(a) and 1026.6(b) of Regulation Z).48

Once the advertising disclosure requirements are triggered, the creditor must set forth:

Truth in Lending: 8.2.4.1 General

In the past, one of the most common abuses in advertising HELOCs was the use of “teaser rates” (more technically called “discount rates”). Creditors would often advertise very low rates for HELOCs without also clearly disclosing that the HELOCs were variable-rate plans and that the discounted teaser rates would soon be replaced by substantially higher rates based on the index and margin of the plan.

As a result, the regulations provide for special disclosures in two cases:

Truth in Lending: 8.2.4.2 Initial Discounted and Premium Rate Disclosures

If a creditor states an initial rate that is not based on the index and margin used to make later rate adjustments in a variable rate plan, the creditor must make certain disclosures.62 This initial rate can be lower or higher than the rate that would have resulted from application of the plan’s usual index and margin.

For an initial discounted or premium rate, the creditor must disclose:

Truth in Lending: 8.2.4.3 Promotional Rate and Promotional Payment Disclosures

Special disclosures apply to HELOC advertisements with promotional rates or payments. A promotional rate is a rate that is not based on the plan’s usual index and margin in a variable rate plan and is less than a reasonably current APR that would result from application of the usual index or margin.68 A promotional rate does not have to be the first or initial rate that applies in a plan but can occur at any point in the plan.

Truth in Lending: 8.3.1.1 General

Creditors are required to make special “early” disclosures at the time an application is provided to the consumer.100 These disclosures are in addition to the HELOC-specific and general “account-opening” disclosures.101

Truth in Lending: 8.3.1.2 Brochure

Both creditors and third parties providing applications must furnish consumers with a brochure available from the CFPB describing HELOC plans.115 The brochure describes HELOC plans, including their potential advantages and disadvantages. The brochure also provides guidance on how to compare HELOC plans with closed-end credit.

Truth in Lending: 8.3.2.1 General

Apart from the exceptions discussed in the following subsection, the disclosures and the brochure must be given to the consumer at the time an application is provided to the consumer.118

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.