We have all heard the saying, “If it’s not broken, don’t fix it,” but that doesn’t mean you should omit regular reviews of your home equity line of credit (HELOC) program — even when trying to balance daily tasks, the pandemic and compliance regulations changes.
The status quo may currently appear to be working until a regulator or external reviewer identifies systemic gaps.
Here are the common errors often uncovered:
Application disclosure timing
Many financial institutions interpret Regulation Z to mean that if the HELOC application disclosure and the “When Your Home is on the Line” brochure are provided within three business days of application, the compliance requirements are met. When the application is received via telephone, the disclosure and the brochure may be delivered or placed in the mail not later than three business days following receipt of the consumer’s application.
However, this is not the case for in-person or online applications. Regulation Z 1026.40(b) specifies the disclosures must be provided at the time of application.
Put simply, if a consumer applies in person, they must receive the disclosures before they leave the office of the lender they are applying with. In addition, if the application is provided via the website or online application software, the disclosure and brochure must be available on or with the blank application.
Only if the application was taken over the phone do you have three business days to provide the required disclosures.
The HELOC application disclosure required to be provided at the time of application is often a template that is reviewed by management annually to update the current interest rate payment examples and historical table required to be disclosed.
Regulation Z 1026.40(d) requires the HELOC application disclosure to include, among other things, an itemization of fees imposed by the financial institution to open, use or maintain the plan, as well as a good-faith estimate of third-party fees that may be assessed to open the plan.
If a financial institution has added an annual fee to its HELOC program or adjusted its origination/application fee, the fees assessed by the creditor must be itemized on the disclosure.
In addition, when is the last time you reviewed your disclosed third-party fees to verify they are being disclosed in good faith? For example, a review of recently closed HELOCs may identify that the total third-party fees assessed at closing are significantly higher than the fees listed or the range of third-party fees disclosed on the HELOC application disclosure. It may be determined that the HELOC application disclosure is no longer providing a good-faith estimate of third-party fees and that updates to the disclosure are necessary.
Initial periodic statement
Providing consumers their initial periodic statement when originating a HELOC has proven to be a challenge.
Regulation Z requires fees paid out of the initial advance to be disclosed using one of two formatting options detailed under Regulation Z. A financial institution requiring the consumer to pay all closing costs at closing relieves itself from the fee disclosures on the initial periodic statement because the fees are not advanced against the line.
However, if you are allowing fees assessed with the HELOC to be advanced through the line of credit with the first draw, those fees must be disclosed consistent with Regulation Z 1026.7(a) or 1026.7(b).
Option 1 for your initial periodic statement requires the fees advanced to be itemized on the first statement. Fees that are finance charges must also be identified as finance charges when itemizing.
Option 2 for your initial periodic statement requires the fees to be grouped together under the heading “Fees.” It is important to note this method can be used only when your periodic statement uses the terms “interest charge” and “total interest” to describe the finance charges assessed as a result of the interest rate.
The periodic statement disclosure option utilized by your organization is likely driven by your vendor; however, financial institutions must ensure fees financed as part of the initial advance are being disclosed as required under Regulation Z.
Have you ever compared the language in your HELOC agreement with the language in your HELOC periodic statement?
Your HELOC agreement is required to disclose how finance charges are calculated. This means your agreement needs to include a clear description of whether unpaid fees and finance charges are subtracted from or included with the daily balance when calculating the finance charges.
For example, if your HELOC agreement states unpaid fees and finance charges will be subtracted from the daily balance, but the daily balance calculation on your periodic statements is including unpaid fees, and finance charges are part of the balance, the interest charge to the consumer is inaccurate.
In addition, this may result in consumer harm because the consumer is being assessed more in interest charges than they should be according to the terms of their agreement. If you advance funds from the first draw to pay loan fees that are considered finance charges, such as the flood determination fee or loan origination fee, these finance charges would also have to be excluded from your interest calculation. There may be a system limitation on how this occurs.
Testing your HELOC agreement and monthly statements periodically is important to confirm your borrowers are being treated as you disclosed. A system conversion, software upgrade or vendor change may result in unintended and unknown changes without proper controls in place to identify discrepancies.
Including the areas identified here as part of your HELOC monitoring program may identify some links that previously weren’t identified as broken.
How Wipfli can help
Loan program monitoring and periodic reviews are important controls for an effective compliance management program. If your head is spinning from these reminders and the intricacies of Regulation Z and your HELOC program, the Wipfli Regulatory Compliance team can help. Learn more on our web page.