HELOCs for Purchase

I thought there was a thread on this, but I was unable to find one. A lender sets up a HELOC for a customer to purchase their principal dwelling. It will be secured by the dwelling. My understanding is that this would be considered a residential mortgage transaction; however, because it is open-end it is exempt from RESPA, but my question has to do with rescission. Am I reading 226.15(f)1 correctly in that the first draw to purchase the dwelling is exempt, but the subsequent draw would be subject to rescission? If this is correct, when would the rescission period begin and how is it documented? Reg Z refers to the "downpayment", I'm obviously not a lender but could the entire line be used to purchase the home? We've also noticed something lately that we're not sure is a problem, but we've been seeing credit lines that appear to be greater than the amount of what we can determine would be the equity. Is this permitted? Thank you.

[This message has been edited by Angela (edited 07-12-2001).]

That section of the Commentary was written before equity lines were put to the creative use of home purchase. The rule made sense when written. Now, however, a HELOC used to purchase is really a purchase money loan. To be sure you don't run afoul of the commentary, you could set the HELOC limit at the amount the purchases plans to draw for closing. Then any subsequent increase would clearly be subject to rescission.

Lucy - you said we "could" limit the amount the borrower plans to draw for closing, but I suppose that means the borrower could say the entire line is for the purchase?

Also, our loan processing area is concerned because they are getting requests to do HELOCs with multiple collateral (i.e. the dwelling and stock/car/etc.) Our product does not provide for adding additional collateral, but I wanted to make this was even permitted? Thank you.

Yes, the borrower could say the entire amount is for purchase. In fact, I used my new HELOC that way when I bought this house.

As for multiple collateral, I suppose you can fashion a loan in a variety of ways. BUT -- there is the IRS to consider. If the security is something other than the borrower's home, the tax deduction angle is going to be lost. And if more and more lenders do this, IRS may take steps to limite the deductability of HELOC interest. They're itching to do this anyway.

Is there a danger here that this loan does not really meet the definition of open-end credit? when the purpose is purchase and the whole line is so used, does the lender reasonably contemplate repeated transactions?

Is there a danger here that this loan does not really meet the definition of open-end credit? when the purpose is purchase and the whole line is so used, does the lender reasonably contemplate repeated transactions?

As long as the line has the capability to be drawn upon, I don't think there is a problem with considering the loan open-end credit. Remember, unless you are doing something unusual, like a 125% loan, the amount of the line will probably be something less than the appraised value of the home, say 80%-90%.

But I still stink you have to provide the rescission notice. After the borrower makes their first payment on the account, the line may have available credit. The borrower can draw that amount any time.

I think that situation is the reason the Regulation reads the way it does.

------------------
Opinions expressed are not necessarily those of my employer.

Paul Brinker CRCM
Director, Corporate Compliance
First National Bank of Omaha
402-964-8313

I contemplated repeat transactions. First, I paid for the house, which we paid off when the sale of our old house was complete. Then, I bought a car. Then I bought another car. So I think I did reasonably contemplate repeated transactions. I also contemplated paying the line down.

Paul, it seems to me that the purchase part is not rescindable (Commentary Sec. 15(a)(5)) but that later advances may be. So, when is the notice of right to cancel appropriately given (at the time of the later advance because those are the extensions of credit that are rescindable?)

Lucy - in your situation, when did (if it did) rescission come into play?

Lucy - I like your sentance "I contemplated paying the line down." That gave me a chuckle this morning because I am also CONTEMPLATING paying off my credit cards.

Doesn't mean I'm going to do it, or am even able to do it, but I AM contemplating.....

Contemplating is what counts! After all, the regulation says if the parties comtemplate repeated transactions.... So I'm contemplating!

In my transaction, the lender was going to sell the home equity line (don't ever tell HUD that this can be done!) and was dotting all i's and crossing all t's. They asked me to write out the waiver explaining my personal financial emergency so the loan would have everything the purchaser was looking for.

So, being a good compliance geek, I sat down and wrote, in my own handwriting, that I was waiving my right to rescind because I didn't have the right to rescind because this was a purchase money loan. Every now and then I wonder if anyone read that and, if so, what they think!

We went to outside counsel - who is quite experienced on this topic - and were advised that, while the first advance used for the purchase (which is usually the full amount of the line in our cases) future advances not for the purchase would be rescindable. I have instructed our staff that the client must at least be intending to use this as a line for us to provide a HELOC, and we cannot restrict the usage. If the client wants a 10 year interest only loan and does not contemplate using this as a line, then we have a 10 year interest only product they are to provide. What I am not 100% comfortable with is the timing of the rescission notice. We do not delay funding, because the first advance is not rescindable. But is have the rescission notice signed at closing sufficient for the next advance: it would be almost impossible for the client to pay down and advance again within 3 business days.

I have the same concerns as kblanchard. What would be the proper way to document this? We have a lender who says his attorney (not the bank's attorney) has told him rescission does not apply and I'm at a loss as to how to explain that it just might and how to do it.

I agree that this is a confusing area ... why are subsequent advances rescindable ... merely because the first one (to purchase) was not? Why aren't subsequent advances treated under the same exception (Sec. 15(a)(2)) from rescission that all regular HELOC advances get?