ARM Rider/Modifications

We want to see whether we can handle an ARM disclosure in a modification agreement or whether the ARM disclosure needs to be separate (an ARM Rider). If it needs to be separate, we’ll need some guidance about what we do for the HELOCs being termed out.

we can handle an ARM disclosure in a modification agreement

You cannot modify a fixed rate product to an ARM with modification agreement. You must treat it as a refinancing and provide all the applicable disclosures.

we’ll need some guidance about what we do for the HELOCs being termed out

How are the HELOCs being termed out? If you are converting a open-end credit to a closed-end credit then again you must treat it as a refinancing and provide all the applicable closed-end disclosures.

On the other hand, if the HELOC terms provide for a prepayment period after the draw period has ended, the arrival of that prepayment period is not a refinance event, and disclosures aren't required if the repayment period was properly disclosed at inception of the extension of credit. This assumes that the terms provided in the HELOC loan agreement will be used, with no changes.

But that would also require that open-end periodic statements continue to be delivered to the borrower until the loan matures, regardless of the fact that the loan may "look like" a closed-end loan. It is still subject to the open-end credit rules.

Thanks for the helpful replies everyone! What was happening is that we need to modify a heloc by changing it to an ARM and was needing to know exactly what the ARM rider language needed to include because we are including the ARM Rider language into the modification agreement. This is a work out situation and there will not be a new note.

There are no workout exceptions found in the open-end rules. It is a new closed end loan. You cannot invoke 1026.20 as the loan is not currently covered under Subpart C.

17(b) Time of Disclosures

2. Converting open-end to closed-end credit. Except for home equity plans subject to §1026.40 in which the agreement provides for a repayment phase, if an open-end credit account is converted to a closed-end transaction under a written agreement with the consumer, the creditor must provide a set of closed-end credit disclosures before consummation of the closed-end transaction.

Thanks rlcarey.

This is a timely conversation as I was asked a question today about modifying an ARM to a fixed rate loan. I have found information Reg Z about the conversion of an open-end to closed-end (and vice versa) requiring new disclosures, but haven't seen the same requirement for converting variable to fixed rate. Can you give me an assist here? Is there a citation in Reg Z or commentary?

Also is it your opinion that a modification could be used with a proper final TIL or do you believe this would require a new application, early disclosures, etc.?

Thanks!

You would have to weigh the specific circumstances (most likely with the help of legal counsel) against the guidance and definitions within 1026.20 to determine whether or not what you are doing constitutes a refinance or not.

Without knowing all the specifics of the transaction, there is no easy answer.