Since the economic upturn, HELOCs are quite popular because real estate values have gone up and rates are low.
At a recent compliance meeting, a panel of Regulators discussed common findings or violations from recent examinations. Near the top of the list were HELOC statement violations. TCA findings agree with the examiner comments related to the disclosure and treatment of fees on the initial statement during our HELOC audits. We covered this a few years ago but feel due to a rash of HELOC audit exceptions and regulators’ comments a reminder of the HELOC requirements under Regulation Z are worth repeating.
The concern (and risk) is not whether a bank charges HELOC fees; rather, it’s what type of fees the bank charges, how they are paid and the format of a bank’s HELOC statements disclosing certain fees. As the subtitle states, the rules surrounding the handling and presentment of bank fees carry very specific compliance requirements and consequences if done incorrectly. HELOC missteps are common and often trigger restitution to the borrower. So, let’s review the rules.
Regulation Z HELOC guidance can be found in §1026.7. The rules explain fees’ critical options. The key steps are to determine what type of HELOC fees are assessed, how they are paid, and what type of statement format your bank should use to disclose the fees.
The fees and statement options are:
- If HELOC fees are assessed, what type are they? Does the bank charge an origination fee, flood certification fee, processing or underwriting fee? If so, then determine whether any of the fees are finance charges. The fees above are typically finance charges.
- Let’s not overlook any third-party fees. For example, is the HELOC being used to purchase a property and do you require the closing to be held at a title company? Did the appraisal require a repair or inspection that will be completed post-closing? When these scenarios occur, they potentially bring additional fees, such as settlement fees or inspection fees, that are considered finance charges.
- The next step is to understand the statement format produced from your core system. There are two options available under Regulation Z: Option A or Option B.
- Option A is considered the traditional statement style and it is defined in §1026.7(a). This style of statement can only be used when HELOC finance charges are paid through the first advance and they will be itemized and identified as finance charges on the statement. Any assessed finance charges must be disclosed and included in the finance charge total disclosed on the statement.
- Option B is the newer-style statement and it’s defined in §1026.7(b). This statement format can be used for any open-end credit and requires the disclosure of all fees, both finance charges and non-finance charges, to be itemized separately using the term “Fees” and they must be included in the Fees Section of the statement.
Another step is to determine how these fees were paid. If the bank requires these fees to be paid by check or in cash and you do not allow account opening fees to be paid through the first draw – or you are using the statement format described in Option B – you can breathe a sigh of relief! However, was the borrower short on cash and you allowed the payment of initial fees to be paid through the first advance? Allowing account opening initial finance charges to be paid through the first draw requires caution when using statement format Option A.
How you allow the payment of fees drive whether to use Option A or B.
Besides using Option A or B, check the Balance Computation method to ensure it corresponds to whichever option you choose. For example, if Option A is used, the Balance Computation method should refer to finance charges; if Option B is used, the word “Interest” should be used in the computation language. Regulation Z provides model language, which can be found in Appendix G-1 and G-1(A).
When using the incorrect statement option, it’s likely restitution will have to be made to the borrower. This restitution calculation is complex, and you may need to call for assistance.
Take the time to review your bank’s HELOC procedures. Do they address the scenarios we described above? Do you know what statement format is used? Most importantly, are your procedures being followed?
If you have questions or are concerned you may have a problem, give us a call.
TCA is A Better Way to manage your HELOC risk!