Written by Loran Jackson, Regulatory Compliance Counsel
Happy Friday! We made it through another week!
Before we enjoy the weekend, let’s talk about Reg Z! Occasionally, we receive questions about the disclosures necessary for home equity lines of credit (HELOCs). HELOCs are interesting, as they are open-end lines of credit governed by Subpart B of Reg Z, but also have their own rules under section 1026.40. Please note that these rules cite to each other, however, section 1026.40 is more detailed and its commentary contains helpful examples of rule application. This blog will explore a few of the required disclosures. Buckle in!
Timing requirements for application disclosures
In general, application disclosures for HELOCs are required to be delivered with an application or at the same time an application is given to the member. This is stated in section 1026.40(b). In this day and age, many members access HELOC applications online, rather than picking up a printed application with disclosures attached. How does the rule address this practice?
The requirements for electronic applications can be found in the commentary to section 1026.40(a)(1) follow the general rule that initial disclosures are required at the time an application is provided to the member. The commentary explains that credit unions must provide the application disclosures on or with a blank application if the application is accessed electronically, such as on the credit union’s website. The good news here is that credit unions have flexibility in satisfying this requirement. For example, the credit union could have the application disclosures automatically appear on the screen when the application appears.
However, this rule often leads to the follow-up question: Are we required to provide the disclosures electronically, or is this optional? The commentary to section 1026.40(a)(3) provides that whether disclosures must be provided in electronic form depends on where the member is and if it is possible to give the disclosures to the member at the time that the application is provided. It states, "if a [member] accesses a home equity credit line application electronically..., such as online at a home computer, the credit union must provide the disclosures in electronic form." (emphasis added). However, "if a [member] is physically present at the credit union, and accesses a home equity credit line application electronically, such as via a terminal or kiosk..., the [credit union] may provide disclosures in either electronic or paper form." Regardless of the form of disclosure, the rule requires the credit union to comply with the timing, delivery, and retainability requirements. Note that under these circumstances, this portion of Reg Z allows disclosures to be made in electronic form without regard to the member's consent or other provisions of the E-Sign Act (see section 1026.5(a)(iii)).
Change in terms notices
Reg Z creates limitations on changing the terms of HELOCs. For example, a member cannot agree to a rate increase because rate increases are limited under 1026.40(f)(1). Therefore, a credit union may be required to determine that the change is not prohibited, get the member’s permission, determine that this change is “insignificant”, or meet some other exception before changing the terms of a HELOC. If one of these conditions is met, the credit union may change the terms of a HELOC agreement, which may require a 15-day change in terms notice.
There are a few changes that a credit union may make only under certain conditions. According to 1026.40(f)(3), a credit union may:
“(i) Provide in the initial agreement that it may prohibit additional extensions of credit or reduce the credit limit during any period in which the maximum annual percentage rate is reached…
(ii) Change the index and margin used under the plan if the original index is no longer available…
(iii) Make a specified change if the consumer specifically agrees to it in writing at that time.
(iv) Make a change that will unequivocally benefit the consumer throughout the remainder of the plan.
(v) Make an insignificant change to terms.
(vi) Prohibit additional extensions of credit or reduce the credit limit applicable to an agreement, [under certain circumstances]."
If the credit union is able under section 1026.40 and other relevant regulations to change the terms of a HELOC, then the credit union may turn back to section 1026.9(c) for the change in terms notice requirements. The commentary to sections 1026.9 and 1026.40 explain that change in terms notices are not required if the member agrees in writing to the change, or if the credit union freezes a line or reduces a credit line rather than terminating a plan and accelerating the balance. For more information on the changes that require an advanced notice, see pages 6-7 of this handy change-in-terms summary.
Loan originators and the SAFE Act
Lastly, let’s think about the SAFE Act and disclosure of the loan originator’s unique identifier. The SAFE Act, and Part 1007 (Regulation G) applies to "residential mortgage loans." Residential mortgage loans are defined as "any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling…." (See section 1007.102). Accordingly, the requirements to disclose the identity of the relevant loan originator also apply to HELOCs, and not only closed-end mortgage loans.
Section 1007.105 of Reg G requires a registered mortgage loan originator to provide his or her unique identifier to a consumer:
"(1) Upon request;
(2) Before acting as a mortgage loan originator; and
(3) Through the originator's initial written communication with a consumer, if any, whether on paper or electronically."
I hope this blog helped to ease some of those HELOC disclosure anxieties!
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About the Author
Loran Jackson was named regulatory compliance counsel in April 2019. In this role, Jackson helps NAFCU members with a variety of federal regulatory compliance issues.