The Truth in Lending Act, Subpart B, governs open-end credit lines secured by a borrower's dwelling. This article assumes that the lender or broker has compliant Early and Initial Disclosures in place and elaborates upon the sections and values that should be updated on a periodic basis.1 Lenders and brokers must periodically review and update these Disclosures for their home equity line of credit (HELOC) programs to ensure that accurate information is provided to the applicant or borrower at the required time. Failure to provide accurate disclosures pursuant to 15 U.S.C. §1637 may result in civil liability, including actual and statutory damages of $200 to $2,000 per individual case or $500,000 or 1% of the net worth of the creditor in a class action suit, attorneys' fees, and enhanced rescission rights.2 However, failure to provide the information as mandated in 15 U.S.C. §1637a, such as the historical example, will not trigger civil liability penalties for creditors.3

HELOCs are considered "open-end credit"4 transactions. An open-end credit transaction is one in which a creditor reasonably contemplates repeated transactions, defines the terms of the transaction, and allows for a periodic finance charge on the outstanding balance (excluding precomputed finance charges).

Generally, HELOC disclosures must be made "clearly and conspicuously, in writing, in a form that the consumer may keep."5 The terms "finance charge" and "annual percentage rate" must be displayed more conspicuously in the disclosures when these terms are used with a corresponding percentage rate or numerical amount.6

Lenders or brokers may elect to compile the required disclosures for their HELOC plans with different (i) draw and repayment periods or (ii) multiple payment options onto one disclosure form. For each combination of options, the creditor must accurately describe how the minimum periodic payment is determined, how often payments are due, if making the minimum payment will repay any or all of the principal balance, and if the possibility of a balloon payment exists.7 In addition, the disclosure must set forth the requisite example payment numbers (minimum payment, maximum payment, and historical example), including values for all combinations of (i) draw and repayment periods and (ii) payment options, but only one representative option needs to be shown within each of the three following categories: (i) "interest only" plans; (ii) fixed percentage of the outstanding balance; and (iii) other repayment options, such as specified dollar amounts.8

In addition to the requirements discussed in this article, the Truth in Lending Act, Regulation Z, and the Official Staff Commentary elaborate upon other required disclosures regarding the terms of the HELOC plan(s). For significant changes to HELOC plans, all disclosures should be reviewed in their entirety.9

The Early Disclosures

By complying with 12 CFR §226.5b of Regulation Z, the lender or broker providing open-end credit need not provide a good faith estimate of settlement costs pursuant to RESPA if the Early Disclosures are provided at the time the applicant applies for credit.10 Reg. Z §226.5b(d) enumerates the required contents of the Early Disclosures as follows:

1. A notice regarding retention of information;
2. Conditions of disclosed terms;
3. The security interest and risk to the home;
4. Possible actions by the creditor;
5. Payment terms;
6. Annual percentage rate;
7. Fees imposed by creditor and third parties to open the plan;
8. Negative amortization;
9. Transaction requirements;
10. Tax implications;
11. Variable-rate disclosures; and
12. An historical example.

The sample forms (see forms G-14A, G-14B, and G-15) containing the information required by the Early Disclosures follow this outline.

Updating - On a regularly scheduled basis, lenders and brokers should revisit the payment terms, fees, and historical example to ensure compliance. The payment terms section sets forth the minimum periodic payment, which is based on the most recent annual percentage rate (index value plus margin, see historical table information, below). Each time the margin or index is updated the values in this section must also be updated.

Lenders and brokers must describe and list the amount of any charges imposed to open, use, or maintain the account and give a statement of when the fees are paid.11 Every time a lender or broker changes the amount of these fees, the update should be reflected in the Early Disclosures. Similarly, required fees that are paid to third parties must be disclosed12 and should be updated appropriately.

Regarding the historical table, payment numbers for variable rate plans based on a $10,000 extension of credit must be updated annually "to reflect the most recent 15 years of index values as soon as reasonably possible after the new index value becomes available."13 Only one index value and one payment per year are required to be shown.14 For fixed rate plans, a recent APR is one that has been in effect under the plan within the preceding twelve months.15 The margin used in the historical table may be a representative margin used with the index by the creditor within six months preceding preparation of the Early Disclosures.16 This requires recalculating all payment values for each of the 15 years. As mentioned above, the minimum payment values must be updated as these are based on the fifteenth year's (the most recent year's) annual percentage rate (index plus margin).

Accordingly, this document should be reviewed semi-annually to ensure that the margin has been used in the preceding six months and annually to update the index value. Generally, the entire document should be reviewed each time there is a change in the terms or fees of an existing HELOC plan or the addition of a new plan to ensure compliance.

Format - Early Disclosures need not be in a form that the consumer may keep.17 For example, creditors are permitted to place these Disclosures on the application that is returned to the creditor.18 These Early Disclosures must be grouped together and segregated from unrelated information such as underwriting criteria, which does not expand upon or explain the required Disclosures.19 However, unrelated information may be provided so long as this is separate from the Early Disclosures.

Timing - In addition to the Early Disclosures, the applicant should be given the brochure entitled, "When Your Home Is on the Line: What You Should Know About Home Equity Lines of Credit"20; this may be given in lieu of HUD's special information booklet. The Early Disclosures and the required brochure must be given to the applicant at the time the application is provided to the prospective borrower.21 The application does not need to be "completed" before the Early Disclosure requirement is triggered.22 The Early Disclosures and home equity brochure must accompany applications available to the public, such as "take ones."23 For applications printed in publications, received by the lender or broker via third parties, or taken over the phone, the lender or broker must mail or deliver the required Early Disclosures and brochure to the applicant within three business days of its receipt of the application.24 However, if the consumer requests, via phone, that the application be mailed, then the lender or broker must provide the application with the required disclosures and brochure.

Initial Disclosures

In addition to the Early Disclosures provided at application, the lender or broker must also provide Initial Disclosures when the borrower opens the HELOC account.25 Some of the information contained in the Early Disclosures must be re-disclosed to the consumer as part of the Initial Disclosures if they were not provided in a form that the consumer may keep.26 The Initial Disclosures require information about:

1. "[C]onditions under which the creditor may take certain action … such as terminating the plan or changing the terms";27
2. Payment information for the draw and any repayment periods;28
3. Negative amortization;29
4. Transaction requirements;30
5. Tax implications;31
6. The fact that the APR does not include costs other than interest;32
7. The variable rate disclosure with the maximum payment example;33 and
8. A minimum payment example based on a $10,000 advance.34

The final two items are not required to be re-disclosed if they were disclosed with the Early Disclosures, including a "representative payment example for the category of payment option chosen by the consumer," and were in a form that the consumer could keep.35

Format - The Initial Disclosures must be in a form the consumer may keep.36 Unlike the Early Disclosures, this set of Disclosures need not be segregated from and may be integrated into the contract.37

Updating - The same updating process described for the Early Disclosures should be applied to the Initial Disclosures.

Timing - The Initial Disclosures must be given at the time of opening a HELOC account and before the first transaction is made.38

Conclusion

Reviewing and updating your Early and Initial Disclosures for your HELOC programs will help to ensure compliance with the Truth in Lending Act and prevent civil liability. In addition to updating the index, margin, and fees, lenders and brokers should review whether the format of the disclosures is one in which the applicant or borrower may keep and ensure that these disclosures are given to the applicant or borrower in a timely manner.