If we have an unsecured line of credit, we are renewing it but adding as collateral a 1-4 family residence currently securing another loan. Would that require disclosure?

If you are securing it with 1-4 family residence and assuming it's an open-end LOC for a consumer purpose you now have a HELOC.

That's what I thought, it was unsecured and we added the property securing the other loan. However, was not disclosed as one, no thought was given that it was turning into a HELOC due to the cross collateral clause and securing it with the property.

Thanks,

You probably missed the right of rescission then also.

Would you opine that you then need to issue disclosures and treat as a HELOC for the various purposes of Reg Z requirements? The concept I am having a hard time with is where is the Reg. Z transaction here? Does adding a home as collateral automatically result in a transaction taking place? I don't see where a new plan is being opened or the loan itself otherwise being modified.

I don't see where a new plan is being opened or the loan itself otherwise being modified.

You are taking a security interest in the consumer's dwelling. How is that not modifying the existing unsecured RLOC?

If the dwelling is the consumer's principal dwelling then rescission was required. I don't see anywhere in 1026.9 where new disclosures are required, however your RLOC is no longer a "not home-secured" RLOC so IMO those sections of 1026.9 will no longer apply to the account for any future changes.

Official Interpretation
Section 1026.40—Requirements for Home-Equity Plans

3. Transition rules and renewals of preexisting plans. The requirements of this section do not apply to home equity plans entered into before November 7, 1989. The requirements of this section also do not apply if the original consumer, on or after November 7, 1989, renews a plan entered into prior to that date (with or without changes to the terms). If, on or after November 7, 1989, a security interest in the consumer's dwelling is added to a line of credit entered into before that date, the substantive restrictions of this section apply for the remainder of the plan, but no new disclosures are required under this section.

If this unsecured line of credit was originated on or after November 7, 1989, you created a new HELOC plan.

Randy, I started to mention that a new plan had been inadvertently created but I was concentrating on 1026.9. Thanks for pointing out the above in 1026.40..

@RL -- It says that in connection with a line of credit "entered into before that date." It doesn't address if both plans are entered into after 11/7/1989.

@Dan . . . Yes, I would think some sort of modification would have to take place to add the collateral. But, a modification is not a Reg. Z transaction requiring initial disclosures. So, you wouldn't issue a HELOC disclosure with the content of1026.40, but you would treat it as a HELOC under Reg. Z going forward? Agree on Rescission as that is specifically mentioned in 1026.15.

1026.15(a)(3): (3) The consumer may exercise the right to rescind until midnight of the third business day following the occurrence described in paragraph (a)(1) of this section that gave rise to the right of rescission, delivery of the notice required by paragraph (b) of this section, or delivery of all material disclosures, whichever occurs last. . . .

The term material disclosures means the information that must be provided to satisfy the requirements in § 1026.6 with regard to the method of determining the finance charge and the balance upon which a finance charge will be imposed, the annual percentage rate, the amount or method of determining the amount of any membership or participation fee that may be imposed as part of the plan, and the payment information described in § 1026.40(d)(5)(i) and (ii) that is required under § 1026.6(e)(2).

Originally Posted by Compliance NABW
@RL -- It says that in connection with a line of credit "entered into before that date." It doesn't address if both plans are entered into after 11/7/1989.

Does it need too? If the line was entered into before that date and no new disclosures are required under this section. I am not sure that it takes a rocket scientist to figure what that means if the plan was entered into after that date.

I surely do not mind being challenged, but how about providing support rather than just opinion?

(Edited AMZ to be a bit more cordial) Opinions are welcomed, but support is desired on regulatory issues.

I don't need to put the supporting evidence here. You do. You are making a statement that if the collateral is added on a plan entered into before 11/7/1989, then it creates a new HELOC plan. The Official Interpretation clearly supports that. However, it does not state what the case is if the collateral is added to a plan entered into after 11/7/1989. So, my question is what establishes that?

Maybe the more relevant question is whether that matters. If we assume that there is no new plan that would trigger disclosures, you still have to deal with the rescission issue. If you have to give the "material disclosures" in order to avoid having a 3 year rescission period when you add the security interest in the home to the existing plan, are you really going to create a separate "material disclosure" document that contains only those disclosures specified in 1026.15(a)(3)? Or are you just going to give the normal full set of disclosures that you would usually give at account opening?

I don't need to put the supporting evidence here. You do.

If you are contradicting the supplied regulatory cites then yes it's your responsibility to supply your supporting documentation for the contradiction.

Like Randy I have noticed your adversarial retorts to advice provided. I personally applaud Randy for calling you out on it. And your above remark has earned you the pleasure of me blocking you so I no longer have to waste my time with your posts.

If you go back to the original Federal Register in 1989 when the original Home Equity Line of Credit rules where publish and yes, I was around and had to implement these changes at the bank I worked at that time, so I am still very familiar with it, you will find the discussion regarding the "transition rules" (below).

The "transition rules" allow for a specific application of the rules during the transition of implementing the new rules. If you were taking some action, like adding a security interest in a consumer's dwelling to a loan that was not entered into prior to the effective date of the new rule, you are stuck with the new rules.

Please show me something that indicates otherwise. Clearly you are not advocating that a consumer should be allowed to risk their current dwelling without the disclosures and protections afforded under Regulation Z, just because you are adding that security interest at a later date to an unsecured loan, because that is exactly what you appear to be advocating.

24684 Federal Register / Vol. 54, No. 110 / Friday, June 9, 1989 / Rules and Regulations
Transition Rules If a home equity plan is entered into prior to November 7,1989, § 226.5b does not apply to that plan. Thus neither the substantive limitations nor the disclosure requirements apply to the plan. Furthermore, if an agreement is entered into prior to the effective date and is renewed by the same consumer (with or without changes in terms) on or after the effective date, the renewed plan also is not subject to the new requirements. (Of course, creditors may have to provide a change in terms notice under § 226.9(c), if applicable.) However, if a line of credit not secured by a consumer’s dwelling is entered into prior to the effective date and a security interest in a consumer’s dwelling is added to the line on or after the effective date, the substantive provisions in § 226.5b(f)—but not the new disclosure rules—will apply to the plan from that point on.

I also think you need to reread the above posts because I never made that statement.

My direct statement from above is "If this unsecured line of credit was originated on or after November 7, 1989, you created a new HELOC plan."

That's a good point from a practical standpoint. I was trying to come to a technical Regulatory conclusion, but, I agree with you here. Might as well just treat it as a new plan in cases where Rescission is in play. There are many scenarios though where Rescission won't be required.

My apologies, I didn't think I was being rude here. My point was that the burden of evidence is on the accuser, which is what I consider RL to be functioning as here.

Sorry, you highlighted in bold the section of the Official Interpretation that basically says that. I appreciate the context given related to that part of the OI being, essentially, a transition rule. I'm not disagreeing about being "stuck" with the "new" rules when a security interest is being added on a plan entered into prior to 11/7/1989. What I still don't see any Regulatory evidence for is when an unsecured LOC was entered into after 11/7/1989 and subsequently a security interest is added. So, for instance, plan is entered into on 1/9/2010 and then a dwelling is added as collateral on 8/19/2021. I don't see any evidence in the Regulation that states this is a new plan requiring disclosures. Even if we say that this is treated similarly to the transition rule accounts, then it becomes a HELOC for all intents and purposes going forward under Reg. Z; however, it says "but not the new disclosure rules," which seems to indicate the disclosures wouldn't be necessary. This leads back to my previous assertion that you asserting a particular treatment that I do not find mentioned anywhere in the Regulation; therefore, I feel the burden would be on you to find something that supports your position. The only way I see this to be accurate is if adding that collateral de facto creates a new HELOC transaction. Again, though, a modification isn't generally covered by Reg. Z, i.e. it is not considered a transaction. This would be similar to a closed-end loan for a Honda Civic, let's say, that had a home added as collateral a few years down the loan. Does adding the home trigger a TRID transaction?

This isn't exactly my area, but I think the issue here is simply that the language is unclear. The first part states:

"The requirements of this section do not apply to home equity plans entered into before November 7, 1989. The requirements of this section also do not apply if the original consumer, on or after November 7, 1989, renews a plan entered into prior to that date (with or without changes to the terms)."

This seems to exclude everything before the date but does not exclude anything after the date (unless it's renewing a plan before that date).

Then it goes on:

"If, on or after November 7, 1989, a security interest in the consumer's dwelling is added to a line of credit entered into before that date, the substantive restrictions of this section apply for the remainder of the plan, but no new disclosures are required under this section."

If you take the "on or after November 7, 1989" out of the sentence, it is still a complete sentence, but would seem to suggest 'that date' would be when the security interest was added. So basically, if you add the security interest after the line is already open. This interpretation would seem to be supported by those first two sentences which seem to exclude plans opened before that date and modified after: "do not apply if the original consumer, on or after November 7, 1989, renews a plan entered into prior to that date".

Just my thoughts.

You cannot mix open-end and closed-end rules. There is no definition of a refinancing in the open-end rules and 1026.20 is just not relevant. You can change the terms of an open-end line of credit under 1026.9, but if you think that you can just explain your way out of why you morphed an unsecured line of credit entered into after1989 and into a HELOC without treating it under 1026.40, well then you are free to advise your institution as you see fit.

And you have to look at all of the rules that are applicable to the "event" (even if not a transaction). Adding a home as collateral to a closed-end auto loan after consummation doesn't constitute a new "transaction" for TRID purposes, but it does trigger rescission under 1026.23.

A modification [of a closed-end loan] isn't generally a refinancing under 1026.20, but a modification of an open-end loan is absolutely a "change in terms" subject to 1026.9. 1026.9 provides different treatments for different types of changes, but it governs ANY change to an open-end consumer transaction. And (as we've already discussed), 1026.15 governs addition of a security interest in a home to an open-end plan, and requires both rescission AND "material disclosures."

I wouldn't say it governs any change, as there are specific examples of things not requiring notice. But, it is a significant change-in-terms, for which notice is required, under 1026.9(c). Notice requirements under that portion of TILA is not the same as issuing the complete HELOC disclosures. Let's say this is a vacation home so you can get off the Rescission train of thought. Again, I agree it would practically make sense, but if this happens with a dwelling addition that doesn't require rescission, then I am sorry to say I just still don't see anything in the Regulation requiring it.

FWIW, I said it is "subject to" 1026.9 and that is correct. Any change in terms has to be evaluated under the rules of 1026.9 to determine whether notice is required, and if required, the timing and content of that notice. All changes in terms are subject to the rules in 1026.9.

Not that it responds to your question but don't forget that there is a difference in coverage between 1026.15 and 1026.40. Are you going to retain the terms of your existing plan that violate the substantive restrictions of 1026.40?

Good issue to raise. If ones exist, then you would have to change them, which, again, is another reason it is more practical to treat like a new plan. However, I just don't see anything that specifically calls for it.