Home Equity LOC FAQs
Printer-friendly VersionUpdated: 06/2011
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.
A. Here’s an example using a homestead with a fair market value of $100,000 and a first lien mortgage for $20,000.
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% of FMV, then no additional draws until the balance drops to 50% of FMV. The loan is not revolving unless the draws are capped at 50% of FMV. If you cap the draws at 50% of FMV, then you don’t have to worry about draws being prohibited because the outstanding balance exceeds 50% of FMV. However, if you want to, you can allow draws up to 80% of FMV, but good luck explaining to the borrower why they can’t make a draw because they drew their HELOC up to 51%. Of course, the borrower could just pay it down to 50% and then draw it up to 80%. (Remember, FMV is the FMV at closing.)
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.
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.
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.
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.
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.
A. No. Only one home equity loan at a time. It can be EITHER closed end or open--but only one!
A. First, the 80% cap applies. So you need to see how much other debt there is. However, most lenders subject HELOCs to 50% of FMV (measured at time the line is put in place) so the HELOC can revolve. If you choose to create a HELOC with an 80% cap, you need to remember that the borrower can’t take any draws until the HELOC is paid down to 50% of FMV. A borrower probably won’t be very happy if they convert a HE, with a principal balance of over 50% of FMV, to a HELOC and then can’t take a draw immediately. If you do this, make sure you make it clear that they will need to pay down the loan before they can make a draw. If the current principal balance of the HEL is 50% or less of FMV, you still should make sure that they understand that once they take draws that cause the principal balance to exceed 50% of FMV, they’ll need to pay it down to at least 50% of FMV before they can take another draw. The difficultly in communicating and managing that is why many lenders simply limit HELOCs to 50 of FMV.
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.
A. This is not addressed in the 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.
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. Here’s an example using a homestead with a fair market value of $100,000 and a first lien mortgage for $20,000.
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% of FMV, then no additional draws until the balance drops to 50% of FMV. The loan is not revolving unless the draws are capped at 50% of FMV. If you cap the draws at 50% of FMV, then you don’t have to worry about draws being prohibited because the outstanding balance exceeds 50% of FMV. However, if you want to, you can allow draws up to 80% of FMV, but good luck explaining to the borrower why they can’t make a draw because they drew their HELOC up to 51%. Of course, the borrower could just pay it down to 50% and then draw it up to 80%. (Remember, FMV is the FMV at closing.)
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 let’s 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!
Convert a HEL to a HELOC
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, most lenders subject HELOCs to 50% of FMV (measured at time the line is put in place) so the HELOC can revolve. If you choose to create a HELOC with an 80% cap, you need to remember that the borrower can’t take any draws until the HELOC is paid down to 50% of FMV. A borrower probably won’t be very happy if they convert a HE, with a principal balance of over 50% of FMV, to a HELOC and then can’t take a draw immediately. If you do this, make sure you make it clear that they will need to pay down the loan before they can make a draw. If the current principal balance of the HEL is 50% or less of FMV, you still should make sure that they understand that once they take draws that cause the principal balance to exceed 50% of FMV, they’ll need to pay it down to at least 50% of FMV before they can take another draw. The difficultly in communicating and managing that is why many lenders simply limit HELOCs to 50 of FMV.
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. This is not addressed in the 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.
Comments & Questions
If you would like to comment on legal topics or if you have questions about this information please call Shannon Phillips at (800) 749-4228 or e-mail sphillips@ibat.org.