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Home Equity Loan Improvements |
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It's time for home equity loan improvements
There's more Regulation Z compliance on the way, courtesy of the Home Equity Loan Consumer Protection Act. This fall banks will have to implement the new home equity loan disclosure rules the Federal Reserve Board was required to issue under the act.
The Federal Reserve released the final version of the home equity regulation on June 5. The rules were made effective June 7. However, compliance is optional until Nov. 7 because Congress gave institutions five months after finalization to start. However, there's no time like the present.
This column is devoted to bankers' most common questions about the demands of this complicated rule. You should, of course, check the regulation and consult legal counsel before acting on these suggestions.
Product Design
Q. This is a disclosure regulation. Does that mean that, while we must provide customers lots of information about home equity products, we are free to design them as we see fit?
A. No. The regulation leaves many design matters to lenders and provides options in a number of other areas. At the same time, however, it creates three absolute restrictions on design:
(1) If you offer a variable-rate program, you must use a base rate beyond your control. Information on that rate must be generally available to the public. Examples include the prime rate as published in The Wall Street Journal or rates on U.S. government securities.
(2) Lenders generally may not terminate the plan and accelerate the balance before the loan's scheduled expiration. There are three exceptions: customer fraud or misrepresentation; failure to meet repayment terms; or action or inaction adversely affecting collateral.
(3) Lenders may not unilaterally change any but insignificant terms of a home equity plan, with the following exceptions:
* You may make changes provided for in the contract, as long as both the triggering event and the resulting changes are stated specifically in the contract.
* You may substitute a new index if the original index becomes unavailable. This is subject to two conditions: the new one's historical fluctuations must be substantially similar to the old one and it must produce a rate similar to that in effect when the old index became unavailable.
* You may prohibit further advances or reduce the credit limit in four circumstances: if the value of the dwelling falls significantly below original appraised value; if you have a reasonable belief, based on evidence, that there has been a material adverse change in the customer's ability to repay; if the customer defaults on any material obligation he's agreed to under the plan; or if government action--such as a reduced usury ceiling--either precludes imposition of the agreed upon annual percentage rate (APR) or adversely affects the priority of your bank's security interest.
If you impose
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