Having a debate on whether the terminology "finance charge" must be used when describing certain fees in the HELOC account opening disclosure (Note). Historically, prepaid finance charges such as flood, tax service and settlement are separately described in the note as "Finance charges". For example, in a Laser Pro HELOC Credit Agreement and Disclosure, these fees are shown in the paragraph heading "You also agree to pay FINANCE CHARGES, not calculated by applying a Periodic Rate, as set forth below:", then items such as flood and tax service fees are listed as "Additional Finance Charges". Then later a few paragraphs below, other fees such as appraisal, survey, etc. are shown in the paragraph heading "Conditions Under Which Other Charges May be Imposed..." then items such as appraisal and survey are listed as "Security Interest Charges".

The question being posed is whether items such as flood and tax service even need to be described as "finance charges" and separately itemized from the other charges. I have always understood that it must be done the way I described above. My support for this is in 12 CFR 1026.5(a)(2)(ii) - For home-equity plans subject to § 1026.40, the terms finance charge and annual percentage rate, when required to be disclosed with a corresponding amount or percentage rate, shall be more conspicuous than any other required disclosure."

It seems to me the only way to comply with 12 CFR 1026.5(a)(2)(ii), is you would have to have the items considered finance charges listed separately and labeled as FINANCE CHARGES in the note.

Am I interpreting this correctly?

Other charges in the HELOC disclosure at account opening must include:

6(a)(2) Other Charges

1. General; examples of other charges. Under §1026.6(a)(2), significant charges related to the plan (that are not finance charges) must also be disclosed. For example:

iii. Charges imposed in connection with residential mortgage transactions or real estate transactions such as title, appraisal, and credit-report fees (see §1026.4(c)(7)).


Why LaserPro lists these charges under Security Interest Charges - I have no idea and you would have to ask them - they have done this for years without explanation.

Thanks. Going back though to my original question - must items such as flood and tax service even need to be described as "finance charges" and separately itemized from the "other charges" (such as your response above)?

Finance charges are determined by 1026.4. They don't change based on it being a HELOC. If they are a finance charge on a closed-end loan, they are a finance charge on a HELOC.

Official Interpretation

Paragraph 6(a)(1)(iv)

1. Finance charges. In addition to disclosing the periodic rate(s) under §1026.6(a)(1)(ii), creditors must disclose any other type of finance charge that may be imposed, such as minimum, fixed, transaction, and activity charges; required insurance; or appraisal or credit report fees (unless excluded from the finance charge under §1026.4(c)(7)). Creditors are not required to disclose the fact that no finance charge is imposed when the outstanding balance is less than a certain amount or the balance below which no finance charge will be imposed.

Okay - so taking the citation I mentioned earlier (12 CFR 1026.5(a)(2)(ii) - For home-equity plans subject to § 1026.40, the terms finance charge and annual percentage rate, when required to be disclosed with a corresponding amount or percentage rate, shall be more conspicuous than any other required disclosure.") coupled with the official interpretation you mentioned above, it seems logical then that items that are considered finance charges must be labeled as "finance Charges" in the the HELOC credit agreement and disclosure/note.

Am I on track?

Yes

I am in a jam and need some guidance ASAP. We use Encompass and they are telling us on our HELOCs that even if the first advance at closing is $100 and the loan amount is $25,000 that the prepaid interest at closing will be based on $25,000 and not the initial advance amount of $100. Can they do this? If so, can someone direct me to the regulation that states such?

Thank you!

What prepaid interest? There is no prepaid interest on a HELOC. Any interest accrued on the loan is billed on the first periodic statement. Someone has a screw loose.