If the bank allows a customer to obtain a home equity line of credit to be used to purchase a house, and the line is being secured by a lien on that house, (and only that house), would the R of R apply if the customer later drew down the line and was residing in the house (they acquired at closing)at the time the money was advanced?

The reason I am asking is this. We have lenders who are trying to push through purchase money mortgages as HELOCs because our HELOC product has only nominal costs associated with it. They are also trying to process HELOCs which would be secured by the borrowers current home, as well as a house they are buying with the proceeds. As part of the deal, the bank wants the customer to pick up some additional costs that the bank is incurring (which costs were not originally disclosed in the early program disclosure).

Sounds like a confusing mess to me. What pitfalls to we need to be aware of if we want to allow these types of deviations to occur?

If you are using the home they are purchasing only on the new HELOC, a right of rescission is not required for the intial purchase. Any advance after that, a right of rescission is required. We go ahead and get the document at closing for future draws, but do not delay the initial draw.

If you are taking both homes as collateral (new and current), then a right of rescission is required on the current home.

Thanks for the reply. Someone told me that getting the Right of Rescission at closing, (when the proceeds are being used to buy the house that will secure the line) is worthless since the purchase transaction is not rescindable. They told me you would be required to obtain the R of R if they draw money later and are living in the house at the time.

Also, as far as future draws are concerned, are they rescindable even if you do not know for sure (at closing) whether the borrower will eventually be residing in the new house?

Any help is greatly appreciated.

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They told me you would be required to obtain the R of R if they draw money later and are living in the house at the time.

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Check out this thread for a good example of a ROR for HELOC purchases.

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Also, as far as future draws are concerned, are they rescindable even if you do not know for sure (at closing) whether the borrower will eventually be residing in the new house?

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I hope you would know what the purpose of the new house will be for. If not why give them owner-occupied pricing? But to answer your question, non-owner occupied property is not subject to the ROR.

Can anyone offer advise about charging additional fees that were not disclosed in the early program disclosure. As mentioned in my original post, because our lenders want to process some HELOC applications for purchase money, there ends up being other costs involved like deed transfer expenses. The bank wants the customer to pay these additional costs, even though we disclosed our HELOC product as "no cost".

I am thinking that the bank has to absorb the additonal costs. Correct??

Also, I am confused about allowing the borrower to use the proceeds to buy a home when the bank is REQUIRING the house to be collateral for the line. How can this be a HELOC when the borrower doesn't even own the property yet? I know that borrowers often take out a HELOC to purchase property, but they have other property to pledge. In the scenario I am presenting, the borrower is actually buying the house in question with the proceeds, and it is the ONLY house securing the line. In other instances, the borrower is pledging both the house they already own and the house they are purchasing (because the house they already own does not have enough equity).

Can anyone help put this in perspective for me?

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The bank wants the customer to pay these additional costs, even though we disclosed our HELOC product as "no cost".

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If you are disclosing no costs then you have a disclosure violation. If you are going to charge these fees for "purchase money" HELOCs then you need to create a separate disclosure to show the fees.

Giving a HELOC on a purchase transaction is no difference then a closed-end transaction (other than disclosures of course). Your money is advanced upon the title transfer at the loan closing.

I agree that you can't charge a fee that isn't disclosed in the initial program description. That is what I've been telling the lenders here so I hope that's right.

What I keep coming back to is the definition of open-end credit which requires that "the creditor reasonably contemplates repeated transactions". Because of this, I tell the lenders that they had better get a ror upfront for purchase loans or they may end up in trouble for disguising a closed-end transaction as an open-end transactions. They better honestly believe there will be future draws that will require a ror. Am I too mean/scary do you think?

Absolutely not. Plus it is a violation of Sec. 32 to "disguise" a closed-end transaction as an open-end transaction to avoid HOEPA.