This came up today and in trying to think about it, I wasn't sure of the answer. Does anyone know if there is a concern about allowing a customer to use their HELOC for overdraft protection? We offer a personal revolving overdraft protection line of credit product that is unsecured but the rate is 21% and fixed whereas the HELOC is variable so I guess that's why the customer is interested in this. As far as I can tell there would be no other disclosures other than have the customer sign the authorization to debit their account. Would appreciate any other thoughts? Thanks!

There should be no regulatory issues (unless you are in Texas and then it would be illegal). However, you have to ask yourself from a moral perspective, is this a feature that you want to offer? While we can't be the equity police, do you want to encourage your customers to tap their HELOC to cover that check for that snickers bar at the convenient store??

This is an old post, but I have the same question. We have never had OD protection on our HELOCs. We offer a personal OD line of credit, credit card, savings account, but now the bank wants to add it to the HELOC. From what you are saying there is nothing regulatory that you have to disclose to the customer, so it is mainly an operational issue? I'm in agreement with your comments and it makes me uneasy to think someone would take an advance on a loan secured by their home because they didn't have money in the checking account for a candy bar. Wish we weren't going that way. We currently have nothing in our agreement that provides for OD protection and I just want to be sure there isn't anything we have to provide to the consumer. Thank you.

"From what you are saying there is nothing regulatory that you have to disclose to the customer, so it is mainly an operational issue?"

That is not really a true statement. You will have to disclose this as an access device in the original disclosures or if adding this feature to a HELOC you would have to meet the disclosure requirements in 226.9(b).

Randy -thank you for clarifying for me. My understanding was that we would have to include this in our agreement. I've been told that some of our banks have just gone ahead and tied it to the checking account so I need to go back and address this with them. Appreciate your help.

I'm back to this topic. What I have determined is that the bank is showing this as another method of accessing the account in our HELOC agreement. They then get the borrower to sign the overdraft protection authorization form that we have in our deposit platform which states from which account the funds are being advanced and in what dollar increments ($100.00) and of course they sign the HELOC agreement. I'm not sure why I'm still uncomfortable but it would appear that this would be acceptable. The problem then is for existing customers who want to now add this to their HELOC. In reading 226.9(b) we have to provide a disclosure prior to the advance being made to cover the overdraft. Would the overdraft authorization form cover this situation as well and be in compliance with that paragraph? Also how would this advance be identified on the periodic statement? Thank you.

There is also the question of whether access to the HELOC from a debit/ATM card makes the HELOC a credit card line under Reg Z and, therefore, not subject to right of offset against funds on deposit (without a separate written agreement).

SavannahOne - could you explain? Our current HELOC allows access via a credit card not a debit card. Are you saying that since we do that we would have to have a separate document authorizing the advance on the HELOC to cover the OD in the checking account?

No. Just saying that granting access to the HELOC from a debit or credit card destroys your "right of offset" against any related deposit accounts unles you have them sign a form specifically granting permission to do so (Reg Z credit cards)

Ok that's right I understand. Do you do provide OD on your HELOCs? If so, how do you handle adding it to an existing HELOC?

Bump - would anyone be willing to share how they handle adding OD protection on an existing HELOC? Thank you.

Alright I'm back. We're still discussing this and working on how to add ODP to an existing HELOC. Section 226.5b(f)(3)(iv) provides that you can make a change to an existing HELOC as long as it "will unequivocally benefit the consumer throughout the remainder of the plan." The Commentary further describes that one of the "unequivocal beneficial changes" is offering an additional means of access to the line, even if fees are associated with using the device, provided the customer retains the ability to use prior access devices on the original terms. Therefore it appears that we don't need any type of modification or addendum to the agreement and that we can just have our customer sign our automatic transfer authorization form. Would that be a correct assessment? Also we are thinking we need to add a paragraph about the overdraft feature in our early plan disclosure or would it be sufficient to include it in our agreement (for new HELOC accounts)? Thank you in advance for your help.

Back to my original statement:

You will have to disclose this as an access device in the original disclosures or if adding this feature to a HELOC you would have to meet the disclosure requirements in 226.9(b).