A home equity line of credit (HELOC) is a unique type of loan that is highly regulated. Reg Z refers to HELOC as an “open-end credit plan secured by the consumer’s dwelling.” and generally provides a draw period followed by a repayment period. Reg Z imposes special requirements for HELOCs including special disclosures, limitations on contract terms, limitations on creditor’s actions a to termination, suspension, or reduction, advertising restrictions, and considerations as to renewal.
- Termination of the HELOC only in certain situations. No creditor may, by contract or otherwise, terminate a HELOC and demand repayment of the entire outstanding balance in advance of the original term (except for reverse mortgage transactions) unless:
- There is fraud or material misrepresentation by the consumer in connection with the plan.
- The consumer fails to meet the repayment terms of the agreement for any outstanding balance.
- Any action or inaction by the consumer adversely affects the creditor’s security for the plan, or any right of the creditor in such security.
- Federal law dealing with credit extended by a depository institution to its executive officers specifically requires that as a condition of the plan the credit shall become due and payable on demand, provided that the creditor includes such a provision in the initial agreement.
- Moving Out of Dwelling Doesn’t Necessarily Mean HELOC Can Be Terminated. Reg Z permits the creditor to terminate HELOC and accelerate balance if the consumer’s action or inaction adversely affects the creditor’s security for HELOC.
- Suspension or Reduction of HELOC in Only Certain Situations. No creditor may, by contract or otherwise, change any term, except that a creditor may prohibit additional extensions of credit or reduce the credit limit applicable to an agreement during any period in which:
- The value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan.
- The creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer’s financial circumstances.
- The consumer is in default of any material obligation under the agreement.
- The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement.
- The priority of the creditor’s security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line.
- The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice.
- Special Wording Required If Triggering Terms Used in Advertising. If any of the following “triggering terms” are set forth in the ad, additional disclosures are required.
- APR or any periodic rate.
- Any info regarding when a finance charge may be imposed, begins to accrue, or how it will be determined.
- Any charge or fee that may be imposed.
Understanding the host of special HELOC rules and limitations is essential to protecting your credit union. Elizabeth fast gives more detail, commentary, examples, and six more of the top HELOC compliance mistakes in her webinar, Avoiding the Top 10 HELOC Compliance Mistakes. Use code HELOC10 for 10% off this information-packed webinar.