Are Piggyback HELOCs out of compliance?
Two weeks until Y2k ... err October 3rd and TRID. Don't worry, that's still plenty of time to get everything finished! (this coming from the guy having to type this from a client's parking lot after hours - will be nice to get past 10/3 and see my colleagues back in Braintree again!)
But enough of TRID for the moment. Let's take a break and tackle another subject ...
Do you offer piggyback HELOCs? Should you? I think some in the industry look down on them, others love them. No opinion on this from me either way, but I do have a word of caution for how these could be used inappropriately.
HELOCs are great. As opposed to closed-end loans, they're especially great because they're easier to disclose (no TRID disclosures here), easier to underwrite, and no ATR/QM concerns! Life is good. But not too good ... Where you have to be careful is that a lender cannot classify a loan as a line of credit just to avoid the extra requirements.
The rule is simple: Lenders can avoid the additional requirements that accompany a closed-end loan by issuing a HELOC only where the transaction is actually a "bona fide" line of credit.
What does that mean? It means you must reasonably expect recurring draws from that line. If you're issing piggyback HELOCs on purchase mortgages to cover the downpayment, let me ask you this: do you reasonably anticipate future advances on that line? When 100% of the line is used to cover the down payment? If the answer is no, then that is not a "bona fide" line of credit and it should be classified instead as a home equity loan instead.
Does this mean piggyback HELOCs are out of compliance? No, I don't think so. I think there are plenty of cases where a piggyback HELOC will be a bona fide HELOC (just not where 100% of the line is being used to make the down payment).
Am I sure about all of this? Well, here's the regulatory language ... Rule 1026.43(h) reads as follows:
Evasion: open-end credit. In connection with credit secured by a consumer's dwelling that does not meet the definition of open-end credit in §1026.2(a)(20), a creditor shall not structure the loan as an open-end plan to evade the requirements of this section
And Rule 1026.2(a)(20) defines this as:
Open-end credit means consumer credit extended by a creditor under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;
(ii) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and
(iii) The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.
We also see a reference to this in the official commentary to 1026.15(f):
Although residential mortgage transactions would seldom be made on bona fide open-end credit plans (under which repeated transactions must be reasonably contemplated), an advance on an open-end plan could be for a downpayment for the purchase of a dwelling that would then secure the remainder of the line.
Translation? The people who wrote the rule think that a bona fide HELOC could rarely be used to purchase a home because it's not reasonable to expect future transactions.
In Other News:
Interested in construction loans and TRID? First of alll, you might think about making sure you have someone at the office who can fill these disclosures out manually- just in case. But secondly- interesting FAQs from the ABA on constuction lending came out yesterday - check them out if you have a subscription.
Still worried about TRID? Well, Ben Craigie with the Mass Bankers Association has you covered! He has myself and Jeremy Potter (General Counsel and CCO for Norcom Mortgage) providing a webinar for you all this Thursday
Have you seen the CFPB's new tool to help explain the Loan Estimate and Closing Disclosure? It's meant for consumers but might be helpful for sales officers trying to get comfortable with the new forms. The tool allows the user to click on different parts of the disclosure and read an explanation on each part.
Some professions demand confidentiality. Lawyers, doctors, bankers, consultants, just to name a few. Among these professions, gossip is bad for business. Every bank customer expects his/her financial information to be kept private. If the Bank president gossips about another customer's accounts to a customer, how can that customer expect the Bank president not to do the same with his later? The same is true- times 100- in my mind, with our consulting work. We survive (going on 25 years) as consultants in New England because people trust us with confidential information. If a client asks me, "hey what is my competitor doing?", and I answer that question, how could that client ever trust me with their business strategies and other personal information again? They couldn't. They shouldn't!
"While gossip can feel like a good way to connect with someone about a common concern of another person, it really repels. Why? Because if you will gossip about a person not in the room, what is to say that you will not gossip about me when I am not around. For that reason, gossip breeds skepticism and erodes trust. With the presence of gossip, communication becomes guarded and efficiency slows."
- David Horsager
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