If a lender pays past due property taxes to protect its collateral on an equity loan, can the lender add the amount paid to principal which would accrue interest and be due as a balloon at maturity? If so, are there any disclosure requirements? These are fixed rate equity loans and the lender provides a coupon book rather than periodic statements. So I believe the next time a coupon book is issued it would need to show the new principal balance. Is there anything else?

Thank you.

It would be governed under State law and your loan agreement as to what would be allowed.

Okay. We'll start there. If the loan agreement and state law allow it, then are there any federal regulatory requirements that need to be addresses regarding disclosures or anything else?

Thank you

Actions under the current agreement due to default for non-payment of property taxes will not trigger additional disclosures as long as you are not changing other terms of the agreement to trigger a refinance under 1026.20(a). Force placed insurance may require specific actions under the Flood regulations and RESPA..

Thank you. I saw that it wouldn't trigger disclosures as a refinance under 1026.20(a). But does the lender have any other obligations such as notifying the borrower that we'll add it to principal if they don't pay the taxes and we do it for them, or any other types of disclosure once we've done it?

As I noted above, the only thing I can think of is that the amount would need to be included in the principal balance on the next coupon book we issue once the existing book runs out. And I assume that if we issued periodic statements on equity loans we would need to show the new principal balance on the statements going forward. But I'm concerned that there may be other things I'm overlooking.

Aside from specific requirements to disclose it after the fact I'd like to hear what anyone thinks about the UDAAP risk. Adding the tax payment to principal means it accrues interest and becomes secured by the borrower's home. This could cause financial harm, so it seems like it could be unfair under UDAAP if you don't inform the borrower of the impact in advance and give them a way to avoid it.

If the consumer wants to avoid harm - they can pay their dang taxes. You mean you don't send them a reminder notice or call them telling them what the consequences will be?

Unpaid real estate taxes are also a lien on the real estate, and it's a lien senior to your loan in most states. And at least where I live, unpaid tax bills accrue interest -- sometimes at rates great than the mortgage loan. So I don't see a financial argument here. I'm only concerned with whether the state law will allow it, and the loan or mortgage documents provide for it.

Thank you everyone for your responses. We do call the borrower, but I'll need to confirm whether we also send a written notice.