I'm looking to see how other banks determine contingency reserves on construction HELOC's. This is a somewhat new arena for me and I want to make sure their requirements, in regards to contingency, will not cause any possible Fair Lending issues.

The bank states the contingency reserve can be up to 10%. This in itself causes me concern as it appears subjective. When asked for more clarity I was told it would depend on whether or not the borrower already had sufficient reserves of their own.

"If borrower has sufficient funds to cover, contingency reserve may not need to be financed, up to 10%, if borrower has sufficient reserves." Reviewed on case-by-case basis.

"If borrower funds are needed to close, 1 month bank statement(s) will be required."

If other banks wouldn't mind sharing how they handle this and their reasons, it would help.

Thank you

So it this a HELOC for which funds are being used to construct the house and then after completion remains as a HELOC?

I ask because I'm not familiar with this type of product in our region.

This would be an existing structure that is being improved and/or rehabbed. Once the improvements/renovations are complete the HELOC would remain.

I'm just wondering if the contingency requirements are too vague and the fact that it is somewhat subjective due to the fact that they're looking at up to 10% versus a flat 10%.

For example, if you have enough reserve available of your own the bank will not require a contingency. If you don't, the bank will require it, but it will depend on how much available contingency the borrower has available - up to 10%.