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How should a bank modify a home equity line of credit (HELOC) and closed-end real estate-secured loans?

May the bank modify a home equity line of credit (HELOC) simply by providing a change in terms notice or must such modifications be treated as a new line of credit under Regulation Z (Truth in Lending Act), subject to the new application requirements including the disclosures requirements? Is the answer the same for closed-end real estate-secured loans?

For HELOCs, it will depend on when the modification will take place. Per the Commentary to 40-2 in Regulation Z, "Section 1026.9(c) applies if, by written agreement under §1026.40(f)(3)(iii), a creditor changes the terms of a home equity plan (entered into on or after November 7, 1989) at or before its scheduled expiration, for example, by renewing a plan on different terms." Yet, the Commentary continues with, "A new plan results…if the plan is renewed (with or without changes to the terms) after the scheduled expiration. The new plan is subject to all open-end credit rules, including §§1026.6, 1026.15, and 1026.40." In other words, if the modification takes place prior to the expiration of the draw period, then the terms of a HELOC may be altered, assuming that both the borrower and the lender agree to the new terms. Yet if the draw period has expired, then it must be treated as if it were a brand new HELOC application and as such comply with appropriate application disclosures, etc.

Closed-end real estate-secured loans

For closed-end loans, see §1026.20(a) and the related Commentary which defines a "refinancing" that would trigger coverage under various requirements. Generally speaking, this occurs when the obligation (i.e., the note, not necessarily the lien) is "satisfied and replaced" by a new obligation. This will typically be determined by state or contract law. (See Commentary to 20(a)-1.)  However, there are exceptions to the general rule. 

One exception is the addition of a “variable-rate feature”' to an existing obligation or a rate increase on a variable-rate feature other than as previously disclosed. In these cases, the change is automatically deemed a "refinancing," even though the obligation may not be "satisfied and replaced." (See Commentary to 20(a)-3.) A second exception to the general rule is that, in limited situations, a change might not be considered a "refinancing" even if the obligation is satisfied and replaced. These situations are listed in §1026.20(a)(1) through (5) and include renewals of loans with no change in the original terms or reductions in the APR and corresponding payments. Unlike HELOCs, however, the timing of these changes typically do not matter. They may take place after the prior loan term has expired. It would, of course, be prudent to consult with legal counsel to determine the best way to approach these situations.

It is important to note that other requirements such as right of rescission may apply to a modification or a refinancing and is triggered when a security interest is or will be retained or acquired in a consumer's principal dwelling, including an addition of such to an existing obligation. (October 2016)

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