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#1826930 - 06/24/13 10:56 PM HELOC Restructuring
Mel in WA Online
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A BOL Q&A recently stated that converting a HELOC to closed-end credit is considered a refinancing and would require all applicable Reg Z and RESPA disclosures.

What if the HELOC is changed to non-revolve, but the payments are left at interest only rather than converted to term payments? Do the disclosure requirements still apply? This is usually done when the property value declines with a subordination request.

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#1826951 - 06/25/13 11:49 AM Re: HELOC Restructuring Mel in WA
rlcarey Online
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What if the HELOC is changed to non-revolve.

That is the definition of a closed-end loan, regardless of what the payment stream might look like.

Now, if you are talking about temporarily freezing the HELOC under the specific conditions which are allowed under the HELOC regulations, then it would remain a HELOC.

A permanent change to a non-revolving loan would require full closed-end disclosures.
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#1827543 - 06/25/13 10:28 PM Re: HELOC Restructuring Mel in WA
Mel in WA Online
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rlcarey,

What if there are no fees to disclose in the full closed-end disclosures (GFE, early TIL)?

Thanks!

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#1827546 - 06/25/13 10:30 PM Re: HELOC Restructuring Mel in WA
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Whether or not there are any fees, you still have to comply with the disclosure requirements of Z and X. Not sure how there can't be any fees. You must have recording to do.
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#1827547 - 06/25/13 10:32 PM Re: HELOC Restructuring Mel in WA
rlcarey Online
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Of course there is one question that is hanging out there. This is at the customer's request - right? Or is this a true workout situation?
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#1827898 - 06/26/13 05:48 PM Re: HELOC Restructuring Mel in WA
Mel in WA Online
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Well, yes and no. During a subordination request, it's discovered that the property value has declined, so Credit Administration wants to non-revolve the HELOC. Not quite a "workout situation" yet, but could potentially be a problem if the line is fully advanced.

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#1827906 - 06/26/13 05:59 PM Re: HELOC Restructuring Mel in WA
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If moving to a closed-end loan is a requirement that you want to impose in exchange for the subordination, then that is your prerogative. If the customer agrees, it is going to be a full blown residential closed-end loan from a disclosure perspective.
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#1828255 - 06/27/13 04:19 PM Re: HELOC Restructuring Mel in WA
Rdy2Retire Offline
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And if a true workout situation, trying to keep borrower in home and avoid foreclosure proceedings, then changing from a HELOC to a closed-end loan would not require GFE & Prel TIL, correct?

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#1828425 - 06/27/13 07:23 PM Re: HELOC Restructuring Mel in WA
rlcarey Online
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Paragraph 20(a)(4)

1. Workout agreements. A workout agreement is not a refinancing unless the annual percentage rate is increased or additional credit is advanced beyond amounts already accrued plus insurance premiums.
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#1828598 - 06/28/13 01:02 PM Re: HELOC Restructuring Mel in WA
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Paragraph 20(a)(4) applies to a workout agreement for closed-end credit. One would need to refer to Paragraph 9(v)(D) and the Commentary to Paragraph 9(c)(2)(v)(11) for open-end credit.

I see no exemption in the open-end credit workout sections for not providing closed-end disclosures if the open-end credit is converted to closed-end credit.
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#1828620 - 06/28/13 01:32 PM Re: HELOC Restructuring Mel in WA
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I guess we might need a tie breaker smile

Richard?
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#1828628 - 06/28/13 01:38 PM Re: HELOC Restructuring Mel in WA
Kathleen O. Blanchard Offline

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Well, I certainly am not Richard, but what about this from the commentary on HELOCs? Seems to be a clue as to intent.

5. Payment terms—applicability of closed-end provisions and substantive rules. All payment terms that are provided for in the initial agreement are subject to the requirements of subpart B and not subpart C of the regulation. Payment terms that are subsequently added to the agreement may be subject to subpart B or to subpart C, depending on the circumstances. The following examples apply these general rules to different situations:

i. If the initial agreement provides for a repayment phase or for other payment terms such as options permitting conversion of part or all of the balance to a fixed rate during the draw period, these terms must be disclosed pursuant to §§1026.6 and 1026.40, and not under subpart C. Furthermore, the creditor must continue to provide periodic statements under §1026.7 and comply with other provisions of subpart B (such as the substantive requirements of §1026.40(f)) throughout the plan, including the repayment phase.

ii. If the consumer and the creditor enter into an agreement during the draw period to repay all or part of the principal balance on different terms (for example, with a fixed rate of interest) and the amount of available credit will be replenished as the principal balance is repaid, the creditor must continue to comply with subpart B. For example, the creditor must continue to provide periodic statements and comply with the substantive requirements of §1026.40(f) throughout the plan.

iii. If the consumer and creditor enter into an agreement during the draw period to repay all or part of the principal balance and the amount of available credit will not be replenished as the principal balance is repaid, the creditor must give closed-end credit disclosures pursuant to subpart C for that new agreement. In such cases, subpart B, including the substantive rules, does not apply to the closed-end credit transaction, although it will continue to apply to any remaining open-end credit available under the plan.
Last edited by Kathleen B; 06/28/13 01:39 PM.
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#1828638 - 06/28/13 01:47 PM Re: HELOC Restructuring Mel in WA
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But it is still a refinance when you move to the closed-end section is it not? It would be for 1026.23 so why not for 1026.20?

It really is a good question and I'm not locked down on my opinion - as I can see it both ways. But hey, you know me, if there is a potential grey area, I'm all for playing devils advocate smile
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#1828693 - 06/28/13 02:30 PM Re: HELOC Restructuring Mel in WA
Rdy2Retire Offline
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And what good are disclosures going to do at this point... I know, I know, that doesn't make any difference in the whole scheme of things!

FDIC examiners have always told me, "When in doubt, disclose". But I think I may use the "common sense" approach on this one.

If anyone else can tell me what they are doing in the "real world", I would appreciate it.

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#1828697 - 06/28/13 02:32 PM Re: HELOC Restructuring Mel in WA
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If I was in the real world, there is not a doubt that I would disclose such a loan. Arguing the nuisances of 1026.20 in front of a judge is just not worth the hassles.
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#1828701 - 06/28/13 02:34 PM Re: HELOC Restructuring Mel in WA
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But it is still a refinance when you move to the closed-end section is it not? It would be for 1026.23 so why not for 1026.20?


1026.23 outlines the requirements of rescission with the consummation of a loan.

1026.20 outlines what disclosures are required, or not required, if subsequent events takes place on an existing closed-end credit.

Converting open-end credit to closed-end credit would not be a subsequent event to an existing closed-end credit.
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#1828736 - 06/28/13 03:01 PM Re: HELOC Restructuring Mel in WA
Rdy2Retire Offline
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Okay, thanks for your insight. Your guidance will help me when I explain to my Special Assets Dept why we will have to give disclosures and abide by waiting days.

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#1829045 - 06/28/13 07:56 PM Re: HELOC Restructuring Rdy2Retire
Mel in WA Online
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Originally Posted By: Rdy2Retire
And if a true workout situation, trying to keep borrower in home and avoid foreclosure proceedings, then changing from a HELOC to a closed-end loan would not require GFE & Prel TIL, correct?


Is a "true workout" defined as trying to keep the borrower in home and avoid foreclosure proceedings?

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#1829051 - 06/28/13 08:04 PM Re: HELOC Restructuring Mel in WA
Mel in WA Online
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Rdy2Retire -

I am also trying to explain how to handle these to my Special Assets department. If we consider the situation of non-revolving the HELOC because the value of property declines (repayment terms remain as interest only) a workout situation, do we still need to provide closed-ended disclosures??

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#1829055 - 06/28/13 08:08 PM Re: HELOC Restructuring Mel in WA
rlcarey Online
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No, you would only be able to freeze the line under the current agreement and the line would be restored if that condition corrected itself. You really can't do anymore than that on a HELOC unless they are in default. I would not consider solely a decline in collateral value a special asset.
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#1829062 - 06/28/13 08:20 PM Re: HELOC Restructuring Mel in WA
Mel in WA Online
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I have to agree, this really isn't a workout. Our current agreement does give us the right to non-revolve, should the value decline. I can't find in the reg where it defines "workout". I'm trying to convince Special Assets that simply non-revolving the line doesn't fall into the workout category and therefore we should disclose. Is there a citing?

Thanks!

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#1829068 - 06/28/13 08:24 PM Re: HELOC Restructuring Mel in WA
rlcarey Online
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No - I think you are misunderstanding. It does not non-revolve - the line is temporarily frozen. It remains governed under the current agreement and all the other open-end rules while the line remains frozen. There are disclosures required, like an adverse action notice, but there aren't any new Reg. Z disclosures required. If you guys are doing something else on HELOCs solely because a decline in property values, you really need to re-evaluate your process.

Read this, it might help you:

http://www.fdic.gov/news/news/financial/2008/fil08058a.html
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#1829078 - 06/28/13 08:36 PM Re: HELOC Restructuring Mel in WA
Mel in WA Online
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Yes, I was misunderstanding, so thanks for the clarification. We are doing adverse action.

I always appreciate your response, rlcarey. smile

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#1829150 - 06/30/13 06:06 AM Re: HELOC Restructuring Mel in WA
Mel in WA Online
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I also discovered our credit department may non-revolve the HELOC during the annual review process if the borrower's credit score has declined. They are not changing any payment terms, rates, etc. only freezing the line. Your thoughts??

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#1829154 - 06/30/13 12:10 PM Re: HELOC Restructuring Mel in WA
rlcarey Online
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Freezing the line can be done under the following conditions:

(vi) Prohibit additional extensions of credit or reduce the credit limit applicable to an agreement during any period in which:

(A) The value of the dwelling that secures the plan declines significantly below the dwelling's appraised value for purposes of the plan;

(B) The creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer's financial circumstances;

(C) The consumer is in default of any material obligation under the agreement;

(D) The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement;

(E) The priority of the creditor's security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; or

(F) The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice.

It goes on further in the commentary to indicate:

Material change in financial circumstances. Two conditions must be met for §1026.40(f)(3)(vi)(B) to apply. First, there must be a “material change” in the consumer's financial circumstances, such as a significant decrease in the consumer's income. Second, as a result of this change, the creditor must have a reasonable belief that the consumer will be unable to fulfill the payment obligations of the plan. A creditor may, but does not have to, rely on specific evidence (such as the failure to pay other debts) in concluding that the second part of the test has been met. A creditor may prohibit further advances or reduce the credit limit under this section if a consumer files for or is placed in bankruptcy.

Solely a decline in a credit score I do not believe would necessarily meet this criteria.

Whatever you choose to do, you should have specific standards that you follow as fair lending applies to servicing loans just as well as to making them.
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