How do you disclose the interest rate for a rate lock feature on a HELOC? It seems that in the recesses of my memory I recall something in Reg Z that said the fixed rate still needs to be expressed as an index plus a margin. Maybe the language said the customer must be able to determine what the locked rate will be.

This was something I worked on a few years ago and now I just can't find it in the reg. Can anyone point me in the right direction? Thanks.

Are you talking about a feature that allows them to fix a certain amount of the line for a specific term at a fixed rate?

If so, I do not believe there is a requirement to tie the fixed rate to an index. It could be at the current rate established by the creditor.

I've been doing some additional research and I believe I've found the section I was thinking of. Comment #5 at the beginning of the commentary covering 226.5b addresses HELOCs with a fixed rate option. It says that the creditor must still comply with the substantive requirements of 226.5b(f).

Among other things, 226.5b(f) says that the creditor can only change the annual percentage rate on a HELOC if the change is based on an index that is outside of the creditor's control.

So while it never seemed very logical to me, this seems to say that the change from an adjustable to a fixed rate needs to be tied to an independent index, although it looks like we can control the margin.

You are correct - see the OSC:

Paragraph 5b(d)(5)(ii)


2. Fixed rate and term payment options during draw period. If the home equity plan permits the consumer to repay all or part of the balance during the draw period at a fixed rate (rather than a variable rate) and over a specified time period, this feature must be disclosed. To illustrate, a variable-rate plan may permit a consumer to elect during a ten-year draw period to repay all or a portion of the balance over a three-year period at a fixed rate.

The creditor must disclose the rules relating to this feature including the period during which the option can be selected, the length of time over which repayment can occur, any fees imposed for such a feature, and the specific rate or a description of the index and margin that will apply upon exercise of this choice. For example, the index and margin disclosure might state: “If you choose to convert any portion of your balance to a fixed rate, the rate will be the highest prime rate published in the ‘Wall Street Journal' that is in effect at the date of conversion plus a margin.” If the fixed rate is to be determined according to an index, it must be one that is outside the creditor's control and is publicly available in accordance with §226.5b(f)(1). The effect of exercising the option should not be reflected elsewhere in the disclosures, such as in the historical example required in §226.5b(d)(12)(xi).

Thanks! That's exacly what I was looking for. I remembered working on this a few years ago, but I just couldn't find it now.

I have a follow up question. As Randy quoted, the commentary says that,

" If the fixed rate is to be determined according to an index, it must be one that is outside the creditor's control and is publicly available in accordance with §226.5b(f)(1)."

But what if the fixed rate is not determined according to an index? Could we simply disclose that the locked rate will be the rate available from the lender on our fixed rate equity loans of comparable maturity or something similar?

I believe what that is saying is if the "fixed rate" that you will offer will be actually based on some sort of variable rate - you have to tie it to an index. Your only other option would be to say that all fixed rate options excercised in the future will be at X.XX%. Few banks are going to want to do that.

The basis for my belief is this statement: "the specific rate or a description of the index and margin that will apply upon exercise of this choice."

I think you're right. It looks like we'd have to base the fixed rate on an index or we'd be required to state the specific rate in advance. Then we'd be committed to lock in balances at that rate at any time in the future for the full term of the HELOC.

But it doesn't seem to require that we commit to the specific margin that we'll add to the index when they choose to lock. Is that how you see it?

Based on the statement: "or a description of the index and margin that will apply upon exercise of this choice" I would say you have to disclose the margin also.

But the example given right after that statement doesn't provide a specific margin. It simply states the index that would be used and says that they'd add a margin. In order for the example to be a valid illustration of the requirement I would think that it would provide an example margin if the Fed requires us to include a specific margin in our disclosure.

OK - I think that you are correct in the early disclosure. But I think that you are required to put forth the actual margin in the contractual agreement. Everything that can impact a HELOC, even the exercising of specific options has to be laid in stone at the time of the contract as no change in terms that is detrimental to the customer is allowed once the contract is signed.

That makes sense, but what is the basis in Reg Z for the conclusion that the rate lock needs to have more detail in the initial disclosure provided at closing compared to the application disclosure? Are you looking at 226.6(a)(2) which says we need to give every periodic rate that may be used and the range of balances to which they're applicable?

The part of 226.6 that is specific to HELOCs simply says that the lender needs to disclose the payment information described in Sec. 226.5b(d)(5)(i) and (ii). It doesn't say that there needs to be more detail at closing. Section (ii) is the one with the example that discloses the rate lock based on prime plus "a margin".

Thanks,

DDB...are you guys having to provide this additional information regarding the rate lock feature on a separate document, or are you able to incorporate that language into your existing HELOC agreements?

We will incorporate it in the agreement provided at closing. It's just not clear to me if we need to state a specific rate for the fixed rate option (such as "Wall Street Prime plus 3.0%", etc) or if we have the flexibility to state that it will be "Wall Street Prime plus a margin" as provided in the example in the Reg Z commentary as cited in my earlier post.