I have scoured through Reg Z and searched here and must resort to posting my question:

In a HELOC early disclosure, must the lender disclose that a default rate may apply?

I ask because we have tried to add the phrase "Absent the existence of an event of default . . . " in front of the early disclosure section that describes how to determine the Periodic Rate but our forms software will not allow this.

Thanks!

Freezing or terminating the line is your only option under 1026.40.

2. Prohibited provisions. A creditor may not include a general provision in its agreement permitting changes to any or all of the terms of the plan. For example, creditors may not include “boilerplate” language in the agreement stating that they reserve the right to change the fees imposed under the plan. In addition, a creditor may not include any “triggering events” or responses that the regulation expressly addresses in a manner different from that provided in the regulation. For example, an agreement may not provide that the margin in a variable-rate plan will increase if there is a material change in the consumer's financial circumstances, because the regulation specifies that temporarily freezing the line or lowering the credit limit is the permissible response to a material change in the consumer's financial circumstances. Similarly a contract cannot contain a provision allowing the creditor to freeze a line due to an insignificant decline in property value since the regulation allows that response only for a significant decline.

Thanks Dan. I think we can increase the margin upon a payment (or other) default, I am just trying to sort out if we have to disclose that in the early disclosure.

From the OSC: Paragraph 40(f)(2)

1. Limitations on termination and acceleration. [Omitted.]

2. Other actions permitted. If an event permitting termination and acceleration occurs, a creditor may instead take actions short of terminating and accelerating. For example, a creditor could temporarily or permanently suspend further advances, reduce the credit limit, change the payment terms, or require the consumer to pay a fee. A creditor also may provide in its agreement that a higher rate or higher fees will apply in circumstances under which it would otherwise be permitted to terminate the plan and accelerate the balance. A creditor that does not immediately terminate an account and accelerate payment or take another permitted action may take such action at a later time, provided one of the conditions permitting termination and acceleration exists at that time.

You can only exercise that option if one of the allowable circumstances takes place that allows the termination and acceleration of the account. You can not impose a default rate for simple past due payments unless the delinquencies are to the point to cause termination. However, you would have to impose a default rate, the OSC does not contradict the prohibition on a provision to increase the margin. IOWs the contract rate would be index plus margin but the default rate would be X. You would not IMO be allowed to change the index or increase the margin. The default rate would have to be a fixed rate.

The default rate, if invoked and allowable by state law, would have to be contracted for in your agreement under it's late charge/default provision. It would not have to be disclosed in the HELOC Plan disclosure.

Thanks Dan - I agree with your assessment.

Can anyone help with the disclosure rules when applying a default rate on a HELOC? The only thing I have found so far is in the commentary and it sounds like you have to give initial disclosures again, which would be strange because upon termination and acceleration, the default rate is fixed. Not to mention the customer would be way confused.

So- do you have to give any type of written notice before or after enforcing a contracted default rate?

Bump.