We are extending the maturity on a consumer-purpose HELOC (no new money, no other changes, has not already matured) secured by a primary dwelling. Are we required to offer the right of rescission on the extension?

When I read Reg Z' commentary 15(a)(1)-1, I interpret "each credit extension" to mean that we must offer rescission.

However, I read a BOL Q&A where the guru (Dan Persfull) said "If the renewal or modification is done prior to the maturity date no new disclosures are required, but if they are done after the maturity, even one day, then you must treat it as a refinancing and provide all new disclosures including the right to rescind."

I may be reading this wrong, but I am confused. Any help is appreciated:)

Others may wish to chime in here but if you are not "extending" new credit(money), what would the customers be rescinding?

No new money, no ROR.

Now, if you replace this HELOC with an entire new note, that may be a different story.

I see your point. The reason I question whether this is correct is this part of the Reg Z Commentary:

"15(a) Consumer's Right To Rescind

Paragraph 15(a)(1)

1. Occurrences subject to right. Under an open-end credit plan secured by the consumer's principal dwelling, the right of rescission generally arises with each of the following occurrences:

i. Opening the account.

ii. Each credit extension.

iii. Increasing the credit limit.

iv. Adding to an existing account a security interest in the consumer's principal dwelling.

v. Increasing the dollar amount of the security interest taken in the dwelling to secure the plan. For example, a consumer may open an account with a $10,000 credit limit, $5,000 of which is initially secured by the consumer's principal dwelling. The consumer has the right to rescind at that time and (except as noted in §1026.15(a)(1)(ii)) with each extension on the account. Later, if the creditor decides that it wants the credit line fully secured, and increases the amount of its interest in the consumer's dwelling, the consumer has the right to rescind the increase.

2. Exceptions. Although the consumer generally has the right to rescind with each transaction on the account, Section 125(e) of the Act provides an exception: the creditor need not provide the right to rescind at the time of each credit extension made under an open-end credit plan secured by the consumer's principal dwelling to the extent that the credit extended is in accordance with a previously established credit limit for the plan. This limited rescission option is available whether or not the plan existed prior to the effective date of the Act."

My question is...what is considered "each credit extension"? If extension is literal (extending the loan), then I think ROR applies. If it means new credit, then no ROR. If I read the "exception" part of the commentary correctly, then I think it means no ROR.

IMO, "extension" of credit is in reference to extending NEW credit.

Thinking practically, I don't see how the customer would benefit from rescinding the extension (prolonging of maturity) of the maturity.

2. Exceptions. Although the consumer generally has the right to rescind with each transaction on the account, Section 125(e) of the Act provides an exception: the creditor need not provide the right to rescind at the time of each credit extension made under an open-end credit plan secured by the consumer's principal dwelling to the extent that the credit extended is in accordance with a previously established credit limit for the plan. This limited rescission option is available whether or not the plan existed prior to the effective date of the Act."

Thanks, Garret01, for pointing me in the right direction. I think you're right...it doesn't make sense to offer rescission in this case.

Are you modifying the existing HELOC or are you refinancing it?

If you are modifying it, no new disclosures or rescission. Provided the HELOC has not matured.

If you are refinancing it you need to provide all new disclosures including rescission. There is no "no new money" exemption in 1026.15.

Modifying the existing HELOC by extending the maturity. The HELOC has not matured. Therefore, I think we are correct that no new disclosures or rescission are required.

If the existing HELOC has not matured then your modification would not require new disclosures or rescission. The modification agreement would spell out the changed terms and the borrower would be agreeing to the changes in writing by executing the modification agreement.

If a customer requests an increase to their current HELOC, is this an application for credit; are we required to provide the borrower with any new valuation/appraisal the Bank developed in connection with the HELOC increase request? Our bank's practice is to modify the current HELOC when a borrower asks for an increase.

Continuing... If the request IS considered an application for credit under Reg B, are we then required to deliver the valuation/appraisal 3 days before signing the new HELOC note and increasing the line? I assume Rescission would not apply since we are only modifying the current HELOC.

If a customer requests an increase to their current HELOC, is this an application for credit;

How would it not be an application for credit? They are requesting additional credit to what they already have.


If the request IS considered an application for credit under Reg B, are we then required to deliver the valuation/appraisal 3 days before signing the new HELOC note and increasing the line?

If it's a first lien transaction the appraisal rules apply.

Thanks, Dan. Since you confirm this is an application for credit, would the Bank need to maintain a WRITTEN application for the requested increase within the loan file? Therefore, the loan file would have 2 applications: the original application and the application for the increase.

An increase in the credit limit would not be for the purchase or the refinancing of the consumer's primary dwelling. The requirements of the Commentary to 1002.13(b) would not apply.

Thank you again, Dan!

I don't think that's correct, but someone else can chime in. Check 1026.15:

Rescission applies to the increase, not the outstanding indebtedness. If their line is $50 and they apply for an increase to $100, the first $50 is rescission-free, but the additional $50 is subject. There's even a separate model form of the rescission notice in Reg Z for this.

Okay, what if the borrower modified the HELOC in 2009 and increased it. Only a mod agremeent was signed and the original agreement was in 2003.

Now the borrower things they have until 2019, when actually their draw period expired last year.

Can we do an "extension" of the draw period for 5 years? Does that require an entirely new plan, disclosures, rescission?

Also, should he have signed a rescission on the mod in 2009?

Can we do an "extension" of the draw period for 5 years? Does that require an entirely new plan, disclosures, rescission?

The HELOC has not matured therefore you could modify the terms of the agreement without new disclosures. The ROR would be required if the LOC is increased. See the Commentary to 1026.40(2).


should he have signed provided a rescission on the mod in 2009?

Yes. The borrower has 3 years for the date of each advance to rescind that advance. IOWs if they took an advance on 1/1/10 they have 3 years to rescind that advance. If they took an advance on 1/1/13 they have 3 years to rescind that advance.

BTW, your modification does not negate their ability to rescind those transactions. The new ROR (which you should provide) would only affect future advances. If you do not provide the ROR with the modification or with each advance then their 3 years from each future advance will continue.

Not rescission, but remember that you must comply with flood insurance rules for a modification.

Dan, you stated it has not matured. What is considered the maturity date?

The regulations states that its a "new plan" subject to new disclosures, etc if it is after the scheduled "expiration date". We were thinking that this means the end of the original draw period (10 years). For this borrower, since their original agreement was 2003, it expired in 2013. The 2009 modification only changed the credit limit, but not the draw period.

Thoughts?

Whether your plan matured or not depends upon how it was set up. Did the original plan have an amortization period after the conclusion of the revolving (draw) period? If yes, then the actual plan has not matured.

If the revolving period ends with a maturity date of the note, a balloon, then the plan matures at the end of the revolving period.

I see, thank you!

Unforunately the original agreement does not indicate which 1 of 3 different programs is selected, and the "Term of Plan" section only references 1 program.

However, the Deed of Trust for this loan indicates 30 years, therefore I believe in this case, the expiration for the purposes of Reg Z Commentary to 1026.40(2) is 2033.

Therefore, based on these replies, it sounds as though we can extend their draw period without new disclosures or ROR, as we are not increasing their line.

Agree?