I am getting pressure from the line of business to allow home equity lines of credit (open-ended credit) to be used to purchase a borrower's primary dwelling (typically would be used for the down payment in conjunction with a first mortgage loan). Commentary 226.15(f) states that only the portion of the line actually used for purchase would be exempt from rescission. This implies that any additional amount of the credit limit, any future extensions of credit, and the plan itself are still subject to rescission (226.15(a)(1)(i)). Therefore, it appears that the only way to accomplish this and be able to disburse the purchase proceeds at the closing would be to create a special rescission form which conveys the right to cancel, but excludes the portion of the line being used to purchase. Our Legal Department has concerns about creating a special rescission notice. Does anyone have any advice or thoughts on this subject?

I think this is a very tricky area, one begging for review and clarification by the FRB. A fair reading of the Reg. is that unless you give the right to rescind as to the entire Plan, all future advances (even readvances of the funds that were part of the purchase money) are rescindable. An even more problematic reading is that since it is the future advances that are rescindable, you don't have the right to cancel until the advance (and, therefore, have to give the notice of the right at the time of each advance), effectively killing the practical use of the line. You also need to consider the amount of the line versus the purchase money advanced to make the determination that this is really open-end credit (do you reasonably anticipate repayment and reuse).

If they want to simply accomodate customers who want to have the funds on hand for closing and then a line of credit to use later on, why not approve a short term 2nd TD that will fund at closing, and then 30, 60, 90 days or whatever, fund the line of credit that will payoff the 2nd? Rescission would apply to the entire line at the time it is initiated.

Just a thought, FWIW.

Actually, Bonnie, this is exactly the process we have been using for years, but the business area is starting to protest, claiming that it's more hassle for the borrower and more expensive for us to do two separate transactions. They claim that some of our competition is allowing borrowers to use the line of credit for purchase, and want to know why we can't. I am in the process now of contacting these competitors to see how they are accomplishing it. Thanks so much for your reply.

I've given some thought to this subject and here would be my advice. I agree with the statement that this needs to be addressed in the regulation as there is no clean way to accomplish this type of transaction and maintain some efficiency for the bank and the customer.

I would open the credit line and advance the money for the purchase money transaction. I would issue a right of rescission (G-5) at the time of closing to cover all future advances on the line. I would then freeze the line to allow no future advances until the right of rescission expires. It's not fool proof, but I think it would be defendable (unless your in the 9th circuit of course).

What rlcarey explains is exactly our advise to our clients. I agree that it is not perfectly clear in Reg Z, but I have discussed it with several examiners who all agree that this is OK.

This method allows you to advance the money to purchase the home (not subject to rescission). Give the RofR to cover all future advances. The rescission period expires before any future advances. This method seems to satisfy all requirements.