Skip to content
BOL Conferences
Thread Options
#2282574 - 03/23/23 06:03 PM HELOC Modification: Fixed to Variable-Rate
Compliance NABW Offline
Diamond Poster
Joined: Oct 2015
Posts: 1,668
I am getting a little spun in circles regarding doping a modification of a HELOC to change it from a fixed rate to a variable-rate. The commentary refers to "adding a variable-rate feature," though I am not sure if that applies here because it is not an addition of a feature, but, rather, modifying the entire plan to a new variable-rate structure. As we are all likely aware, the standard rule for a HELOC is that terms cannot be changed (per 1026.40(f)(3)). Changes can be made under a written agreement, but such an agreement is still subject to the restrictions of 1026.40(f). Wouldn't changing totally to a variable-rate plan constitute changing the APR in a prohibited manner, or is the change in the rate still considered to be based on an index not under the creditor's control (assuming WSP Prime or the like is used) because the initial rate change would still be index based even though not previously disclosed as variable-rate? Is all that is needed a change in terms notice and the minimum payment and historical example disclosures?

[i. If the index is changed, the maximum annual percentage rate is increased (to the limited extent permitted by § 1026.30), or a variable-rate feature is added to a fixed-rate plan, the creditor must include the disclosures required by § 1026.40(d)(12)(x) and (d)(12)(xi), unless these disclosures are unchanged from those given earlier.]

It doesn't make sense to me why the Regulation would only call for the (12)(x) and (12)(xi) parts of the disclosure and not any other variable-rate information if it's an entirely new variable-rate structure.

Return to Top
Lending Compliance
#2282575 - 03/23/23 06:15 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,022
Galveston, TX
Do not confuse the disclosure requirements referenced under 1026.40, as those are just early disclosures requirements. You are also bound to include all disclosures required under 1026.6(a) (or optionally 6(b)) if you are changing any features of the plan that make those original account opening disclosures invalid.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#2282578 - 03/23/23 06:26 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
rainman Offline
Power Poster
rainman
Joined: Nov 2004
Posts: 3,225
1) This can't be done just by notice; the borrower has to agree in writing - it would be a prohibited change under 1026.40(f) but is permissible if the consumer agrees to it.
2) The notice (included in or with the agreement) has to satisfy all of the requirements of 1026.9(c)(1), which means (as Randy notes) you have to disclose the new terms of any of the original 1026.6 disclosures that have changed. IN ADDITION, you have to include the 1026.40(d)(12)(x) and (xi) disclosures as required by 1026.9(c)(1).
_________________________
Nobody's perfect, not even a perfect stranger.

Return to Top
#2282635 - 03/24/23 03:51 PM Re: HELOC Modification: Fixed to Variable-Rate rainman
Compliance NABW Offline
Diamond Poster
Joined: Oct 2015
Posts: 1,668
Originally Posted by rainman
1) This can't be done just by notice; the borrower has to agree in writing - it would be a prohibited change under 1026.40(f) but is permissible if the consumer agrees to it.
2) The notice (included in or with the agreement) has to satisfy all of the requirements of 1026.9(c)(1), which means (as Randy notes) you have to disclose the new terms of any of the original 1026.6 disclosures that have changed. IN ADDITION, you have to include the 1026.40(d)(12)(x) and (xi) disclosures as required by 1026.9(c)(1).

How do you view this piece of the Official Interpretation in light of your answer (1) above? --

1. Changes by written agreement. A creditor may change the terms of a plan if the consumer expressly agrees in writing to the change at the time it is made. For example, a consumer and a creditor could agree in writing to change the repayment terms from interest-only payments to payments that reduce the principal balance. The provisions of any such agreement are governed by the limitations in § 1026.40(f). For example, a mutual agreement could not provide for future annual percentage rate changes based on the movement of an index controlled by the creditor or for termination and acceleration under circumstances other than those specified in the regulation. By contrast, a consumer could agree to a new credit limit for the plan, although the agreement could not permit the creditor to later change the credit limit except by a subsequent written agreement or in the circumstances described in § 1026.40(f)(3)(vi).

Return to Top
#2282638 - 03/24/23 04:04 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,022
Galveston, TX
Not rainman, but that is what they were saying. You can only change an existing HELOC (other than under very limited circumstances) with a written agreement signed by the borrower. You cannot just send a change of terms notification like you can with other open-end credit products.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#2282643 - 03/24/23 04:21 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
rainman Offline
Power Poster
rainman
Joined: Nov 2004
Posts: 3,225
What rlcarey said. If you want to break it down piece by piece:

* .40(f)(3) says you generally can't change terms of a HELOC. Then it provides six exceptions to that general rule.
* .40(f)(3)(iii) is one of those exceptions. It says you CAN make a change if the consumer agrees to the change in writing at the time of the change. The OSC that you quoted is explaining certain details about that exception.
* One of those details is that you can't have an agreement with the consumer that would violate the provisions of 1026.40(f). The HELOC after the change in terms agreement still has to comply with 1026.40(f). Thus, you can have a variable rate, but the variable rate terms have to comply with 1026.40(f), one of which is that the index can't be under the creditor's control.
_________________________
Nobody's perfect, not even a perfect stranger.

Return to Top
#2282678 - 03/24/23 08:54 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
Compliance NABW Offline
Diamond Poster
Joined: Oct 2015
Posts: 1,668
Thank you both for your input. It gets confusing though because part of the prohibitions of (f) is changing the APR and the modification changes the APR. So, to me, when it says it still has to comply with (f), a written agreement to change the APR would seem to not comply with (f).

Return to Top
#2282697 - 03/27/23 03:25 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
rainman Offline
Power Poster
rainman
Joined: Nov 2004
Posts: 3,225
Except that (f) doesn't prohibit changing the APR. It prohibits the lender from unilaterally changing the APR (without the borrower's consent). But it permits: a) changes tied to an index not under the lender's control; b) a permanent reduction in a fixed rate or reduction of the margin used for a variable rate (which is a change that would unequivocally benefit the consumer for the remainder of the loan term; and c) a change agreed to in writing by the consumer. The consumer can agree to a change if the new term otherwise fits what is permitted under (f), which includes a variable rate tied to an index not under the creditor's control.
_________________________
Nobody's perfect, not even a perfect stranger.

Return to Top
#2282720 - 03/27/23 07:16 PM Re: HELOC Modification: Fixed to Variable-Rate rainman
Compliance NABW Offline
Diamond Poster
Joined: Oct 2015
Posts: 1,668
Originally Posted by rainman
Except that (f) doesn't prohibit changing the APR. It prohibits the lender from unilaterally changing the APR (without the borrower's consent). But it permits: a) changes tied to an index not under the lender's control; b) a permanent reduction in a fixed rate or reduction of the margin used for a variable rate (which is a change that would unequivocally benefit the consumer for the remainder of the loan term; and c) a change agreed to in writing by the consumer. The consumer can agree to a change if the new term otherwise fits what is permitted under (f), which includes a variable rate tied to an index not under the creditor's control.

Again though, (c) would seem to be limited by (a) and (b). My issue with (a) here is that it is not a change tied to the index solely, but, rather, it is a change from not having a rate based on an index to having a rate based on an index. In other words, it is not because WSJ Prime moved, which to me is a change "based on the index," but, rather, because the terms went from a fixed rate to a rate based on WSJ Prime (for example). So, again, the movement in the index didn't cause the change in the APR, the adoption of the index did.

Return to Top
#2282725 - 03/27/23 07:46 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,022
Galveston, TX
It is simple:

1026.40(f) Limitations on home equity plans. No creditor may, by contract or otherwise:

(3) Change any term, except that a creditor may:

(iii) Make a specified change if the consumer specifically agrees to it in writing at that time.

So, as long as the change you are making does not otherwise violate 1026.40, you can do whatever you and the borrower want to, if you get the borrower to sign the modification and thus, agree to the changes in writing.

The other option is to just have them get a new HELOC and start over. It really is a business decision.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#2282728 - 03/27/23 08:17 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
Inherent_Risk Offline
Platinum Poster
Joined: Jan 2017
Posts: 559
You can change the by APR by written agreement. Unless they wrote "controlled by the creditor" in the commentary just to confuse people. Banks modify HELOCs by written agreement in ways that affect APR all the time.

Return to Top
#2282744 - 03/27/23 10:39 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
rainman Offline
Power Poster
rainman
Joined: Nov 2004
Posts: 3,225
Compliance NABW, wouldn't your reading indicate that you can never make any change to a HELOC at all? If the change has to comply with 1026.40(f), and 1026.40(f) prohibits changes, then you can't make any changes. The "no change" prohibition is just as much a part of (f) as the "tied to an index" requirement.

The point of the OSC is that yes, you can agree with the borrower to convert from a fixed to a variable rate. But the variable rate has to be tied to an index as described in the variable rate rules.
_________________________
Nobody's perfect, not even a perfect stranger.

Return to Top
#2288901 - 09/20/23 05:13 PM Re: HELOC Modification: Fixed to Variable-Rate rainman
Compliance NABW Offline
Diamond Poster
Joined: Oct 2015
Posts: 1,668
Originally Posted by rainman
Compliance NABW, wouldn't your reading indicate that you can never make any change to a HELOC at all? If the change has to comply with 1026.40(f), and 1026.40(f) prohibits changes, then you can't make any changes. The "no change" prohibition is just as much a part of (f) as the "tied to an index" requirement.

The point of the OSC is that yes, you can agree with the borrower to convert from a fixed to a variable rate. But the variable rate has to be tied to an index as described in the variable rate rules.

(f) doesn't totally prohibit changes though, it prohibits changes except for what is specifically mentioned as allowed.

Return to Top
#2288931 - 09/21/23 01:06 PM Re: HELOC Modification: Fixed to Variable-Rate Compliance NABW
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,022
Galveston, TX
Correct, there is nothing that would prohibit a creditor from changing a HELOC from a fixed rate plan to a variable rate plan through a written modification signed by the borrower. Not really sure why a borrower would agree to that unless they currently had a very high fixed rate - but that is not the point. The variable rate plan in the written modification would have to be tied to an index that is not in control of the creditor to continue to meet the requirements of 1026.40(f)(1).
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top

Moderator:  Andy_Z