We have a customer who wants to obtain a HELOC on his current primary residence to purchase a new primary residence. Is this allowed? The loan officer tells me that this is not being structured to avoid TRID but is at the customer's request. Thanks.

we had a similar thing a few weeks back ... the Bank doesn't allow it per policy. It turns out that the customer just didn't understand the difference between open-end and multi-advancing closed end.

We don't allow it per policy either, but the customer is very strongly negotiating that this is what they want. In order to obtain the relationship, the officer is asking if this is not allowed per regulation as the bank is willing to make an exception to policy.

Yes, it is allowed as there is no regulation prohibiting this. At a previous employer we had a lot of these.

If they qualify for the HELOC, why do you care what they use the money for as long as it is not an illegal purpose?

I don't, but wanted to make sure that there wasn't a citation somewhere that said we couldn't. I don't know why we have that stipulated in bank policy. Thanks Randy.

Open end credit is generally riskier than closed end fully amortizing loans. This may be one of the reasons it's stipulated in bank policy.

I am going to check with my credit administrator about that. Thanks Skittles.

It sounds to me the HELOC is being used in place of a bridge loan.

This issue comes up every now and then and it has recently resurfaced with a conversation XXXXXX and I had a few days ago which resulted in repricing our bridge loans and a recent HELOC approved for the purpose of a bridge loan.

As Senior Management and Department Managers I am providing you the following summary of the regulatory reasons HELOCs should not be used for bridge loans or other temporary financing.

From Reg. Z 1026.2 - Definitions

(20) Open-end credit means consumer credit extended by a creditor under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;

This is the regulatory (legal) definition of open-end credit which is the category HELOCs fall in. The bank knowingly making a HELOC for temporary financing purposes such as a bridge loan would have a difficult time defending their position they were reasonably expecting repeated transaction on the loan for the 6 – 12 month term of the loan.

From Reg. Z 1026.35 – Requirement for higher-priced mortgage loans

(d) Evasion; open-end credit. In connection with credit secured by a consumer's principal dwelling that does not meet the definition of open-end credit in § 1026.2(a)(20), a creditor shall not structure a home-secured loan as an open-end plan to evade the requirements of this section.

(e) Repayment ability, prepayment penalties. Except as provided in paragraph (e)(3) of this section, higher-priced mortgage loans are subject to the following restrictions:

(1) Repayment ability. A creditor shall not extend credit based on the value of the consumer's collateral without regard to the consumer's repayment ability as of consummation as provided in § 1026.34(a)(4).

The majority of these loans are going to fall within the higher-priced mortgage loan (HPML) category.

Using our revised pricing for bridge loans I ran a $100,000 sample loan for a 6 & 9 month repayment term. The 6 month term’s APR was 6.314% which is 2.654% above the Average Prime Offered Rate (APOR). The 9 month term’s APR was 6.062% which is 2.402% above the APOR. Any loan that is 1.5% or greater above the APOR is a HPML and must follow the requirements of Reg. Z 1026.35, including the ability to repay.

The most prevalent reason for doing HELOCs as a bridge loan is the loan originator is wanting to avoid charging the borrower the additional fees, the shorter processing time since HELOCs are not subject to TRID under Reg. Z 1026.19, .37 & .38 and we don’t have to follow the ability to repay requirements in 1026.35 on open-end credit. Based on this we could be cited in our compliance exam for willfully evading the required closed-end disclosures by structuring a closed-end transaction as an open-end transaction to avoid them.

Under the HMDA rules these loans are no longer exempt from reporting since they are structured to be repaid from the sale of the property. HELOCs are not subject to HMDA reporting so again we could be cited for structuring a loan to avoid necessary reporting requirements.

In a nut-shell using an open-end credit product for a loan that based on its purpose should be structured as a closed-end product can and does present numerous compliance issues and potential legal issues if the loan ends up in court.

As the compliance office, and based on regulatory reasons I have to continue advising against using HELOCs as bridge loans or for other temporary loan situations.