Home Equity Lines of Credit (HELOC) - Periodic Statements

Recent Federal Reserve consumer examinations have identified cases of fee disclosure errors on HELOC periodic statements. Currently, banks have two options for providing HELOC periodic statement disclosures, which we will discuss. Banks should determine the option used and then ensure appropriate disclosure of fees in the statements. Failure to disclose these fees accurately may result in understated finance charges and potential reimbursement to customers.

Option 1: Non home-secured open-end plan rules. Effective July 1, 2010, HELOC periodic statement disclosures may be provided according to the requirements for non home-secured open-end plans under Regulation Z. Under this option, banks may group fees, including finance charges that are financed, and interest charges separately. In addition, banks do not need to disclose an effective annual percentage rate (APR). Banks that assess fees that would have impacted the effective APR must:

• Group finance charges attributed to periodic interest rates, using the term “interest charge,” under the heading Interest Charged. The bank must also disclose interest totals for the statement period and calendar year.
• Group other charges imposed as part of the plan under the heading Fees, identified by feature or type. The bank must also disclose fee totals for the statement period and calendar year.

Regulation Z provides a model format for reference.

Option 2: Home-secured open-end plan rules.¹ Under the second approach, banks must disclose and itemize finance charges added to the account during the billing cycle, using the term “finance charge.” Banks must distinguish between amounts attributed to periodic rates and other finance charge amounts. It is important to ensure that your bank includes financed charges in these disclosures, whether financed initially or during the life of the loan, as follows:

• Start-up fees paid from the first advance, such as points, loan fees or other similar account-opening charges, must be included as part of the finance charge on the first periodic statement; these charges need not be factored into the APR.
• Other finance charges that occur during the life of the loan, such as transaction or advance fees, must also be included in the finance charge on the periodic statement. Banks must include these charges when calculating the effective APR.

Banks that review their HELOC periodic statements to ensure proper disclosure of fees should be less likely to violate requirements.

More information on home equity lending is available in the Safety and Soundness Update, which discusses good risk management practices for refinancing junior liens.

Endnote

1 The periodic statement rules for non home-secured open-end plans are included in Regulation Z section 1026.7(b) and for home-secured open-end plans in Regulation Z section 1026.7(a).

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