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Question & Answer
Question: If we change a home equity line of credit from a variable rate to a fixed rate, what disclosures do we need to give the customer? Is it any different if the change is from fixed rate to a variable rate?
Answer: There are two key tests in Regulation Z to determine whether new Z disclosures are required. The first - and most important - is whether the change is a modification or a replacement of the note.
The rule in Regulation Z is that a modification to an existing note does not trigger a disclosable event. Your first question should be: "what are we doing with the underlying agreement - the note?" If that is being modified, you probably don't have new disclosures. However, if you are replacing the old note with a new one, you have a new loan.
The neat thing about this rule is that the creditor has control of its fate, so to speak. The choice about whether to use a modification or a new note is the creditor's. However, we would warn you to use this in good faith! When the transaction really is a new agreement (and not a workout triggered by delinquency) you should bite the bullet and give all new disclosures.
The second concern is whether the change is to the customer's benefit. If the change is a modification to the consumer's benefit, you do not have to give new disclosures.
General folk wisdom has it that a fixed rate loan is better than a variable rate loan. Therefore, there is little question about changing from a variable rate to a fixed rate loan. Unless you have done something quite dreadful with the interest rate, the assumption would be that this is in the consumer's favor.
However, if the change is from a fixed to a variable rate, two things happen. First, folk wisdom assumes that the old terms were more favorable than the new terms. Second, Regulation Z requires that whenever you add a variable rate feature to a loan, you must make variable rate disclosures. So changing from fixed rate to variable rate raises the question of which disclosures to give - full disclosures or variable rate disclosures. The wisest approach would be to give complete home equity credit line variable rate program disclosures. Besides, for lines of credit, they aren't all that different.
Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 5, No. 8, 7/00
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