Home Equity Loan Improvements
There’s more Regulation Z compliance on the road, thanks to the Home Equity Loan Consumer Protection Act. This fall banks will have to implement a new home equity loan disclosure rules the Federal Reserve Board is required to issue by law.
The Federal Reserve left the final version of the home equity lines on June 5. The rules were effective June 7. However, compliance is optional until November 7 because Congress gave institutions five months after finalization to start. However, there is no time like the present.
This column is dedicated to the most common bankers’ questions about the requirements of these complex rules. You of course, check the rules and legal adviser before you this advice.
Product
T. This is the disclosure rules. Does this mean that while we the customers more information about home equity products have provided, we are free to design them as we see fit?
J. Regulation number design allows much important for lenders and provides options in several other areas. Simultaneously, however, creates three absolute restrictions on design:
(1) To provide a variable rate program, you need the base level beyond your control. Information on these charges in general should be available to the public. Examples are interest published in The Wall Street Journal or the level of U.S. government securities.
(2) Lenders generally may not stop the plan and accelerate the loan balance before the scheduled end date. There are three exceptions: customer fraud or wrong, no payment, or act or not act in compliance adverse impact on security.
(3) Lenders may not unilaterally alter, but not significant in terms of home equity plans, with the following exceptions:
* You can make changes to the contract provisions, both during events and through changes resulting specifically mentioned in the contract.
* You can be replaced by a new index as the original index became available. This is subject to two conditions: the new historical fluctuations must be substantially equal to the old and the same number that applies when the old index was available to produce.
* You may prohibit further advances or reduce credit limit in four circumstances: if the value of the property is significantly lower than the original estimated value, if you reasonably believe, based on evidence, that there is material adverse change in the ability of customers to repay, if the customer defaults on any material obligation he agreed to under the plan, or if the government measures - such as reduced usury ceiling - either prevent the imposition of the agreed annual percentage rate (APR) or adversely affect the priority of the security interests of your bank.
If you have restrictions based on four conditions to be imposed, should your actions if and when the problem is removed.
Battle Disclosure
T. What are the requirements for the first revelation?
A. the heart of this regulation is a new requirement that customers be given detailed information and a general brochure about home equity plans when provided with the application. The only exception is for use in magazines or taken by telephone or via third party. In this case, the creditor may mail or deliver information and brochure to the customer within three business days after receipt of the request.
T. Is this disclosure should be in the form of the customer can continue?
A. Not when they are provided with the application. This means that the option to print only disclosure on the application form. If you do, but you also need a statement showing the customer a copy.
T. Initial disclosure should be presented in a particular format
A. Yes. You have to believe that some of the conditions are grouped and separated from other information. These conditions are as follows (assuming that they apply), the first four must precede all others:
* Customers need a copy of the publication.
* Any time that the customer must apply for acceptance to the conditions described. Alternatively, including a statement that the conditions can change. In addition, the lender is that the customer is entitled to the costs of any changes to the refund requirements and, with the result that customers decide not to enter into the plan.
* A warning that the lender obtained a security interest in residential customers and that customers could lose his house if he defaults.
* An advisory that in certain circumstances the lender may terminate the plan and expedite outstanding balance, prohibit further advances, reduce the credit limit, or otherwise modify the plan, as specified in the loan agreement.
* A discussion of the payment plan terms. This should include: a long period of interest and any repayment period, explaining how the minimum payment, payment deadline, and if only the minimum payment will not repay all or one of the principal balance, and the fact that the conversion Plan takes stock of fixed term loans.
You also need an example, based on balance and $ 10,000 April recently, where the minimum periodic payment, balloon payments, and the time required to pay only the $ 10,000 minimum payments and the balloon without further progress.
* For fixed-rate loan, the APR one that applies in the previous 12 months. For variable rate plans, historical tables comply with this requirement.
* A detailed description and the cost of the loan that the lender charges to open, use or maintain the account. This can be expressed as one U.S. dollars amount or percentage. You must also estimated the total U.S. dollars compensation by third parties and to invite customers to ask for more specific information.
* The fact that negative amortization may occur and that the main increase balance and reduce Customer Equity.
* Any restrictions on the number and size of credit extensions within a period and no minimum balance or draw rules, stated as one U.S. dollars amount.
* A statement that customers should consult with a tax advisor regarding interest and fee reductions.
T. If we offer a variety of home equity plans, or we post a separate entry for each one have?
J. No. Banks can choose a separate entry for each home equity product plan or a more general term used to cover them all.
If you use individual disclosures, you must inform customers that they should ask about other options.
If you use a general disclosure, you are asked to describe relationships or relationships that the availability of certain terms. For example, if your customers that your home equity loan is available with the payment of certain plans and if the customer the opportunity to choose these payment plans varies depending on the requirements of other loans, such restrictions must be explained.
Examples of such relations: Say a bank offers two plans, one with a five year term and the other with a ten years period. Bank interest payments is only part of the five years plan, but requires payment of interest and principal under the ten years plan. A generic disclosure should indicate these differences.
T. Where do we get the brochure to be given?
A. You can use the model brochure by the Federal Reserve Board, or develop your own that is substantially similar. If the version of the Fed to use you a genuine copy of the Federal Reserve Bank and reprints them verbatim. You can also reprint the brochure Fed bank name and logo.
Q. disclosure of the application form that seems quite simple. But I foresee difficulties sending the required notice within three days for the phone, third party, and magazine insert applications. Is this area will be a management problem?
A. doubt. You must have a system and training to handle such requests. Staff should be directed to note them in a special log identifying the applicant, upon receipt, applications and resources. You then have the requisite notice to produce and record the date they were.
T. We must express the situation where we can change the terms of the plan and what changes might be. These can grow quite long. They should all be included in the initial disclosures?
J. No. You can if you want them all, if you do, you do not group them with other early disclosures. However, if you want, you can see that the borrower is a list of circumstances in which the lender may obtain such action.
In both cases separately is that the lender has the right to terminate, accelerate, prohibit new advances, reduce the credit limit, or other changes. You must also state the cost of termination.
Management Tip: Determine which employees have the power to stop or change the plan terms. Then make sure that employees understand the rules. Decentralization may result in legal decision-making and issues of customer relationships.
T. Our bank home equity lines can be accessed with a credit card. Should we enter a new credit card early disclosures (ABA BJ, June, p. 14) to the people to our home equity plan?
J. No. The Federal Reserve a new credit card rules specifically excluded such plans.
Start Disclosure
T. What is the difference between “early” disclosures and “initial” disclosures?
A. first disclosure were added by this rule - the people who should be provided with the application. Initial disclosure is the main Truth-in-Lending disclosure is always required on or before the loan completion.
T. Are the new rules affect the first revelations that we have done?
A. Yes. You must first publication of the early disclosure terms that do not need duplicates of all term early.
In addition, early publication includes a complete list of conditions under which the bank can terminate or modify the plan, which, of course, the limitations previously described. Not enough here to simply tell the customer that he can get a list like that, unlike the initial disclosure requirements.
Loan Agreement
T. Requires regulatory change our standard loan agreements?
A. Very possible. As previously mentioned, make sure that the agreement index for the public outside your control, which only allows early termination in circumstances permitted by the rules and regulations to the details of any special requirements, both event triggers and change the results use change. The latest example: To assess the employee option plans, the contract may provide that a certain volume will apply if the borrower by the lender work completed.
Ads
T. Is changing the rules of our ability to advertise these loans?
A. Yes. Adding a new line “triggering terms” the advertising provisions of Regulation Z. “Triggering terms” are terms that you can not use in an advertisement without disclosing further details.
Home equity loans, triggering a new period all disclosure requirements in the first (except for security interests), and the payment terms. You may not positive or negative statements (such as “no annual fee”) at this point without including, in the same ad, which clearly and conspicuously the following statement:
* Any loan fee that is calculated as a percentage of the credit limits and other cost estimates for the open, expressed as a number or range.
* Any periodic rate used to calculate the financial costs, expressed in April
* April maximum, and variable rate plans.
T. There was a problem in the past with regard to advertising the tax benefits of home equity loans. Is this intended?
A. Yes. If you advertise that interest may be taxed, make sure that these ads are not misleading. Fed suggested, for example, that you also added that customers should consult with a tax advisor to the impact of the state to determine.
T. Are there any other advertising regulations?
A. Yes. If your ad mentions initial fixed discount rate, please specify how long these rates will apply and the “current enough” in April with the same great discounted. If you advertise a minimum payment, you should also mention that a balloon payment will result from it, as it happens. Finally, you can not link to a home equity plan as “free money” or use other misleading terms.
Other problems
T. We are obliged to return the cost to customers who returned from the application because the conditions change. What is involved in this deal?
J. Submit all fees, including credit report and appraisal fees, if the customer decides not to take the loan because terms changed between application and completion. The only exception is if it was changed in April in line with the reported variable was the level functions.
T. Third parties, such as a loan broker, distribution of some of our application. Are they affected?
A. Third parties are required to provide home equity brochure and, if they have their first lender disclosure. However creditors are not required to provide them good. Yet it is probably a good idea to at least one brochure.
T. Once this engine we have introduced regulatory compliance, what problems we encounter in staying fit?
A. For variable rate plan would be a problem to update the historical example of $ 10,000 per year. It is necessary to show how the indexed rate would be set for each year for 15 years (not started in the year 1977, adjusted as required to close rate mortgages end). Historical examples should be updated annually.
The second problem is the maintenance, of course, a necessity for the disclosure of the program when the conditions were changed to new accounts when you change or offer a new program. When this happens, check all steps taken to bring together the beginning of the compliance plan.