FAQs
Open-end Periodic Statement Provisions
HE LOCS
Question: Are mortgage loan originators (MLO) required to provide their Nationwide Mortgage Licensing System (NMLS) number on HELOC applications, notes, and security instruments?
Answer: The NMLS disclosure requirements found in Reg. Z – 1026.36(g) apply only to closed-end consumer credit transactions secured by a dwelling. Therefore, the requirement does not apply to HELOCs, which are considered open-end credit.
The SAFE Act, which also has requirements related to providing NMLS ID numbers, covers residential real estate open-end credit, but does not include a requirement to include the NMLS ID number on certain loan documents. However, the other SAFE Act disclosure requirements must still be followed. The MLO shall 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.
Question: We offer a variable HELOC that is priced off a Treasury rate with a 4% margin. It has a floor of 5% and a ceiling of 12% and can adjust monthly with no cap on the monthly adjustments. Our current fully indexed rate is over 8% and we’re considering sending a change-in-terms notice to all HELOC borrowers notifying them we are lowering the interest rate ceiling to 7.75% to bring everyone’s rates down. If rates continue to climb and we need to adjust the interest rate ceiling back up, can we send another change-in-terms notice to restore the original line of credit contract terms? Or would it better to change our contract margin amount and recalculate rates based on this margin amount?
Answer: Regulation Z’s rules related to changing the terms of a HELOC agreement are pretty restrictive and generally do not allow you to change terms in a manner that will increase the cost of credit to the borrower unless the borrower agrees to such changes in writing. (See § 1026.40(f)) This section however, does allow creditors to change terms that “unequivocally benefit the consumer throughout the remainder of the plan” (See § 1026.40(f)(3)(iv)). Unless you were planning to honor the lower ceiling rate or margin amount for the remainder of the contract term, you would not want to provide a change-in-terms notice lowering the ceiling or margin, because Regulation Z would prohibit you from later sending another change notice to increase the ceiling and /or margin rates.
The commentary to this section does state however, you can temporarily reduce fees or rates, but then may be required to provide a change in terms if, and when, the rate returns to its normal level.
Paragraph 40(f)(3)(iv)
- Beneficial changes. After a plan is opened, a creditor may make changes that unequivocally benefit the consumer. Under this provision, a creditor may offer more options to consumers, as long as existing options remain. For example, a creditor may offer the consumer the option of making lower monthly payments or could increase the credit limit. Similarly, a creditor wishing to extend the length of the plan on the same terms may do so. Creditors are permitted to temporarily reduce the rate or fees charged during the plan (though a change in terms notice may be required under §1026.9(c) when the rate or fees are returned to their original level). Creditors also may offer an additional means of access to the line, even if fees are associated with using the device, provided the consumer retains the ability to use prior access devices on the original terms.
So rather than changing the ceiling or margin amounts, you could send a notice to all HELOC customers that their current rate is being reduced to 7.75% until their next scheduled rate change date. Then further explain, at their next interest rate change date, their rate will be adjusted according to their original contract terms. Or you could send a change-in-terms notice notifying the borrower their rate is being reduced to 7.75% until a specific date, after which their rate will adjust according to the original contract terms. Instead of changing the contract terms for the remainder of the loan term, you are temporarily reducing the current rate only.
Question: Are we required to send out a periodic statement for a HELOC in which there is no outstanding balance and no payment due?
Answer: Section 1026.5(b)(2)(i) of Regulation Z outlines the periodic statement requirements for consumer, open-end credit, including HELOCs.
(2) Periodic statements. (i) Statement required. The creditor shall mail or deliver a periodic statement as required by §1026.7 for each billing cycle at the end of which an account has a debit or credit balance of more than $1 or on which a finance charge has been imposed. A periodic statement need not be sent for an account if the creditor deems it uncollectible, if delinquency collection proceedings have been instituted, if the creditor has charged off the account in accordance with loan-loss provisions and will not charge any additional fees or interest on the account, or if furnishing the statement would violate Federal law.
So, if there is no outstanding balance on which finance charges were imposed, a periodic statement is NOT required.
Question: We are contemplating offering a new flat fee HELOC product. With this product, the consumer will pay the bank a flat fee of $1000 and from this fee, the bank will pay all third party expenses for closing costs such as the lien search, recording fee and automated valuation, retaining the balance as fee income for the bank. Is this permitted or must we itemize third party fees on the HE LOC program disclosure and agreement?
Answer: The bank may charge a “flat fee” and pay third party costs from this single fee. The HE LOC disclosure content rules, found in §1026.40(d) of Regulation Z require the disclosure of fees imposed by the creditor to open the plan (§1026.40(d)(7)) as well as fees imposed by third parties to open the plan (§1026.40(d)(8)). However, comment #1 to §1026.40(d)(7) states:
40(d)(7) Fees Imposed by Creditor
1. Applicability. The fees referred to in §1026.40(d)(7) include items such as application fees, points, annual fees, transaction fees, fees to obtain checks to access the plan, and fees imposed for converting to a repayment phase that is provided for in the original agreement. This disclosure includes any fees that are imposed by the creditor to use or maintain the plan, whether the fees are kept by the creditor or a third party. For example, if a creditor requires an annual credit report on the consumer and requires the consumer to pay this fee to the creditor or directly to the third party, the fee must be specifically stated. Third party fees to open the plan that are initially paid by the consumer to the creditor may be included in this disclosure OR in the disclosure under §1026.40(d)(8).
Question: I have a question related to a disclosure in the Home Equity Line of Credit Important Terms Disclosure. What Annual Percentage Rate should be used in the $10,000 minimum payment example when the initial Annual Percentage Rate is discounted? For example, if our variable rate HELOC has an initial discounted Annual Percentage Rate of 5.25% for the first six months, but the most recent Annual Percentage Rate provided in the historical example is the fully indexed rate of 5.75%; what Annual Percentage Rate should be used to calculate the $10,000 minimum payment example?
Answer: The minimum payment example must use the recent Annual Percentage Rate provided in the historical example or the fully indexed rate. So, in your example the most recent Annual Percentage Rate provided in the historical example or the fully indexed rate of 5.75% should be used. The initial discounted rate should not be used per the Regulation Z and Commentary provided below.
Section 1026.40 (d) Content of disclosures (5) Payment terms. The payment terms of the plan. If different payment terms may apply to the draw and any repayment period, or if different payment terms may apply within either period, the disclosures shall reflect the different payment terms. The payment terms of the plan include: (iii) An example, based on a $10,000 outstanding balance and a recent annual percentage rate, showing the minimum periodic payment, any balloon payment, and the time it would take to repay the $10,000 outstanding balance if the consumer made only those payments and obtained no additional extensions of credit. For fixed-rate plans, a recent annual percentage rate is a rate that has been in effect under the plan within the twelve months preceding the date the disclosures are provided to the consumer. For variable-rate plans, a recent annual percentage rate is the most recent rate provided in the historical example described in paragraph (d)(12)(xi) of this section or a rate that has been in effect under the plan since the date of the most recent rate in the table.
Commentary 1026.40(d)(5) states for variable-rate plans, the example must be based on the last rate in the historical example required in §1026.40(d)(12)(xi), or a more recent rate. In cases where the last rate shown in the historical example is different from the index value and margin (for example, due to a rate cap), creditors should calculate the rate by using the index value and margin. A discounted rate may not be considered a more recent rate in calculating this payment example for either variable- or fixed-rate plans.
Question: We have a customer with a home equity line of credit that has matured. They have only a small balance on the line of credit right now but will soon start a big kitchen remodel project and would like to use the HE LOC to pay for that. Since the HE LOC has matured, can we simply do a change in terms agreement and extend the maturity date on the HE LOC rather than refinance it and go through the entire disclosure process again?
Answer: Unfortunately, a change in terms agreement cannot be used once the HE LOC has matured; even if you are only extending the maturity date of the HE LOC. Regulation Z permits a change in terms agreement for purposes such as renewing a plan on the same or different terms, if the written agreement is executed at or before the HE LOC’s scheduled expiration date. See the Official Staff Commentary to 1026.9(c)(1)(i):
Changes to home-equity plans entered into on or after Nov. 7, 1989. Section 1026.9(c)(1) applies when, by written agreement under §1026.40(f)(3)(iii), a creditor changes the terms of a home-equity plan — entered into on or after November 7, 1989 — at or before its scheduled expiration, for example, by renewing a plan on terms different from those of the original plan.
A request to extend or renew a HE LOC can be accommodated with a written change in terms agreement if executed prior to or at the maturity date of the HE LOC.
Question: Our Home Equity Line of Credit product features a variable rate based on the Wall Street Journal Prime Rate. Since that rate has changed, do I need to update my HELOC program disclosure to change the index rate shown in the $10,000 repayment example and the Historical Index table?
Answer: It’s not likely. See the Official Staff Commentary to 1026.19(b)(2).
Revisions. A creditor must revise the disclosures required under this section once a year as soon as reasonably possible after the new index value becomes available. Revisions to the disclosures also are required when the loan program changes.
So the index value in the Historical Example table and your $10,000 repayment example are ONLY required to be updated annually. Check your disclosure language to see what date the index was determined. The disclosure typically provides this language in the Historical Example, stating something like: “The index values are from the following reference period: XXXX (E.g., the first week of January).” So you are only required to update the index on your table as of the date described in your HELOC program disclosure each year. Some banks do update the disclosure each time the index changes, but again, you are only required to do so once annually as of the date described in your program disclosure.
Question: When are we required to provide the early HELOC program disclosure and booklet (that are supposed to be provided at the time the application is provided to the applicant) when a consumer applies online?
Answer: Regulation Z requires that if the application for a home equity line of credit is provided electronically, the HE LOC disclosures (program disclosure and booklet) must be also be provided electronically on or with the application. The commentary to 1026.40(a)(1) – #5 provides several alternatives for delivering electronic HELOC disclosures:
- The disclosures could automatically appear on the screen when the application appears;
- The disclosures could be located on the same web page as the application if the application contains a clear and conspicuous reference to the location of the disclosures, and indicates that the disclosures contain rate, fee and other cost information;
- The disclosures could be available through a link on or with the application, but the applicants cannot be allowed to bypass the disclosures before submitting the application;
- Or the disclosures could be located on the application immediately preceding the button that the applicant will click to submit the application.
The commentary indicates that this list of alternatives is not exhaustive; rather, institutions are supposed to have flexibility in giving the disclosures. The commentary also clarifies institutions don’t have to confirm that applicants have actually read the disclosures before allowing them to submit the application.
Question: Does the Right of Rescission apply to a refinance of an existing HELOC if the credit line amount is the same? The lender is the same institution, and there is no new advance of funds at closing.
Answer: Yes, the refinance of a HE LOC is rescindable, even if the LOC amount is not increased. The open-end credit rescission rules are different than the closed-end credit rules. The closed-end credit rescission rules, found in § 1026.23(f)(2), provides an exemption from the right to rescind for refinances if no new money is advanced:
(f) Exempt transactions. The right to rescind does not apply to the following :…(2) A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer’s principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation.
It is important to note however, the same exemption does NOT apply in the open-end credit rescission rules, found in § 1026.15. The only exemptions found in the open-end rules are for residential mortgage transactions (purchase money transactions) and a credit plan in which a state agency is a creditor. Thus, the right of rescission is triggered for open-end plans each time a consumer enters into a credit plan in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, thus a refinance of a HE LOC is rescindable. (August 2020)
Question: Can we modify a HELOC simply by providing a change in terms notice, or must such modifications be treated as a new line of credit under Regulation Z, subject to the disclosure requirements for a “new” application?
Answer: It depends upon when the modification occurs. Per the Commentary to 1026.40-2 in Regulation Z, “Section 1026.9(c) applies if, by written agreement under §1026.40(f)(3)(iii), a creditor changes the terms of a home equity plan (entered into on or after November 7, 1989) at or before its scheduled expiration, for example, by renewing a plan on different terms.” Section 1026.9(c) outlines the change in term notice requirements for open-end lines of credit.
However, this same comment continues with, “A new plan result however, if the plan is renewed (with or without changes to the terms) after the scheduled expiration. The new plan is subject to all open-end credit rules, including §§1026.6, 1026.15, and 1026.40.” In other words, if the modification takes place prior to the expiration date of the plan, then the terms of a HELOC may be modified, assuming that both the borrower and the lender agree to the new terms. But if the plan has expired, the change must be treated as if it were a brand new HELOC application and as such, comply with appropriate application disclosures, etc.
Question: We have a customer requesting a payment deferral on their open-end, home equity line of credit (HELOC). Can we accommodate this request with a modification agreement? Can we prohibit additional advances on the line during the deferral period? Are there any other compliance implications we should take into consideration?
Answer: Yes, the bank can modify a HELOC payment with a modification agreement. Many of the same factors for modifying a closed-end mortgage loan should be considered when modifying an open-end line of credit. For example, the agreement should clearly specify which terms the institution and borrower are agreeing to change, as well as when the changes are effective and when the payment deferral period ends. Finally, the agreement should indicate all other terms and conditions of the original agreement remain in place and be signed by all obligors (or the authorized person for a legal entity borrower).
Whether or not the bank can prohibit future advances on the line depends upon the circumstances surrounding the modification request. Reg. Z’s rules related to HE LOCs, found in §1026.40(f)(3)(vi), limit the creditor from prohibiting additional advances or reducing the credit limit unless certain conditions apply, such as a significant decrease in the value of dwelling securing the line, the consumer is in default, or if the creditor believes 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 Official Staff Commentary to this part provides further explanation:
Material change in financial circumstances. Two conditions must be met for §1026.40(f)(3)(vi)(B) to apply. First, there must be a “material change” in the consumer’s financial circumstances, such as a significant decrease in the consumer’s income. Second, as a result of this change, the creditor must have a reasonable belief that the consumer will be unable to fulfill the payment obligations of the plan. A creditor may, but does not have to, rely on specific evidence (such as the failure to pay other debts) in concluding that the second part of the test has been met. A creditor may prohibit further advances or reduce the credit limit under this section if a consumer files for or is placed in bankruptcy.
So if the consumer is in not in default and the value of the dwelling has not decreased, the bank will need to make a determination as to the borrower’s financial circumstances and document that determination in the loan file if the bank decides to restrict future advances on the line during the deferment period. It is also important to note, creditors are only permitted to prohibit additional extensions of credit while one of the designated circumstances exists. When the circumstance justifying the creditor’s action ceases to exist, credit privileges must be reinstated, assuming that no other circumstance permitting such action exists at that time.
One last compliance reminder, under Reg. Z’s periodic statement rules, a periodic statement must be delivered as required by §1026.5(b)(2) for each billing cycle at the end of which an account has a debit or credit balance of more than $1 or on which a finance charge has been imposed. There are exceptions to the periodic statement rules, such as when the creditor deems the account uncollectible, if delinquency collection proceedings have been instituted, or if the creditor has charged off the account and will not charge any additional fees or interest on the account. But none of these exceptions apply to a line with an agreed upon payment deferral program in place. So the bank will need to work with its core provider to ensure an accurate periodic statement is generated reflecting the adjusted payment terms.
Open-end Periodic Statement Provisions
Question: What are the statement requirements and for which products do they apply?
Answer: For credit card accounts under an open-end (not home-secured) consumer credit plan, periodic statements must be mailed and delivered at least 21 days prior to the payment due date disclosed on the statement (pursuant to 1026.7(b)(11)(i)(A)).
For non-credit card, open-end consumer credit plans, if a grace period applies, periodic statements must be mailed or delivered at least 21 days prior to the date on which the grace period expires. If no grace period applies, periodic statements must be mailed or delivered at least 14 days prior to the date on which the required minimum periodic payment must be received in order to avoid being treated as late.
For HELOCs, the servicer shall provide the consumer, for each billing cycle, a periodic statement. If a mortgage loan has a billing cycle shorter than a period of 31 days (for example, a bi-weekly billing cycle), a periodic statement covering an entire month may be used. The periodic statement must be delivered or placed in the mail within a reasonably prompt time after the payment due date or the end of any courtesy period provided for the previous billing cycle.
Question: What date is considered to be the “payment due date” for purposes of the credit card account 21-day statement delivery period?
Answer: The “payment due date” is the date by which the creditor requires the consumer to make the required minimum periodic payment in order to avoid being treated as late for any purpose. It does not include any “grace” or “courtesy” period allowed by creditor before a late fee is imposed. In some cases, this period is set forth in the account agreement while in others it is provided as an informal policy or practice. Regardless, the payment due date is the due date according to the legal obligation between the parties.
Question: Can you provide an example of the distinction between payment due date and end of grace period?
Answer: For example, if an account agreement for a home equity plan provides that payment is due on the first day of the month but a late payment fee will not be assessed if the payment is received by the fifteenth day of the month, the payment due date is the first day of the month. Similarly, if a cardholder agreement provides that payment is due on the fifteenth day of the month but, under the creditor’s informal “courtesy” period, a late payment fee will not be assessed if the payment is received by the eighteenth day of the month, the payment due date is the fifteenth day of the month.
Question: Is there a requirement to disclose on HELOC periodic statements that rates may vary? I know that the program agreement needs to detail the variable rate information, but does the HELOC periodic statement also have a similar requirement?
Answer: Yes, there is a similar, but abbreviated variable rate disclosure requirement for periodic statements. The periodic statement requirements are found in Reg. Z section 1026.7 in the discussion regarding the disclosure of periodic rates:
(a)(4) Periodic rates. (4) Periodic rates. (i) Except as provided in paragraph (a)(4)(ii) of this section, each periodic rate that may be used to compute the finance charge, the range of balances to which it is applicable, and the corresponding annual percentage rate. If no finance charge is imposed when the outstanding balance is less than a certain amount, the creditor is not required to disclose that fact, or the balance below which no finance charge will be imposed. If different periodic rates apply to different types of transactions, the types of transactions to which the periodic rates apply shall also be disclosed. For variable-rate plans, the fact that the periodic rate(s) may vary.
So, if your HELOC program has a variable rate feature, your periodic statement must include a statement that “the periodic rate may vary.”
CREDIT CARDS
Question: When can payments be considered “late” on credit card accounts?
Answer: For open-end (not home-secured) consumer credit plans (i.e., credit card accounts), the bank should not treat a payment that meets the required minimum periodic payment as late if received within 21 days after mailing or delivery of the periodic statement disclosing the due date for that payment. For open-end non-credit card consumer credit plans, a bank cannot treat a required minimum periodic payment as late if received within 14 days after mailing or delivery of the periodic statement.
Question: What actions must a creditor take in order to increase the APR on a credit card account?
Answer: Creditors must provide written notice to consumers 45 days before the creditor increases an annual percentage rate on a credit card account or makes a significant change to the terms of a credit card account. On the change in terms notice, creditors must inform consumers of their right to cancel the credit card account before the increase or change goes into effect. If a consumer does so, the creditor is generally prohibited from applying the increase or change to the account.