Compliance Blog

Posted by Sarah Loats

Although most of the HOEPA provisions apply to closed-end loans, the final rule did tweak advertising rules for HELOCs. The major changes to Section 226.16 relate to the clear and conspicuous standard, the advertisement of promotional terms, and the advertisement of initial discounted and premium rates. As Anthony mentioned, these rules apply for advertisements that occur on or after October 1, 2009.

Promotional Rates and Payments
If a HELOC advertisement includes a promotional rate or payment amount, the advertisement must also include:

1. the period of time during which the promotional rate or payment will apply (the promotional period); and

2. information about the rate or payment that will apply after the promotional period. These must be listed in a clear and conspicuous manner with equal prominence and in close proximity to each listing of the promotional rate or payment.

A promotional rate is defined as a rate, in a variable rate plan, that is not based on the index and margin that will be used later in the plan, if that rate is less than a reasonably current APR that would be in effect under the index and margin.

A promotional payment is defined, for a variable-rate plan, as a payment applicable for a promotional period that is not derived by applying the index and margin, and is less than other minimum payments under the plan derived by applying a reasonably current index and margin, given an assumed balance. For a non-variable-rate plan, the promotional payment is any minimum payment applicable for a promotional period if that payment is less than other payments required under the plan given an assumed balance.

Initial Discounted and Premium Rates
First of all, what’s the difference between a discounted/premium rate and a promotional rate? The rule limits discounted/premium rates to initial rates (so, a promotional rate could occur anytime throughout the loan). Also, a promotional rate is a rate that is not based on the index or margin that will be used later only if that promotional rate is less than a reasonably current APR that would be in effect under the index and margin. A discounted/premium rate is an initial rate that is not based on the index and margin to be used later, period. Got that? Ok…

Under the rule, if an advertisement states a discounted or premium rate, it must also state the amount of time the rate will be in effect, and a reasonably current APR that would be in effect using the index and margin. Again, these must be stated with equal prominence and in close proximity to the advertised discounted or premium rate.

Television and Radio Ads
The final rule provides alternative disclosure options for radio and television HELOC advertisements that contain trigger terms. A radio/television HELOC ad that contains a trigger term may comply with the disclosure rules by providing APR information and a toll-free telephone number (or any number that allows the consumer to reverse charges) along with a reference that the consumer may call to obtain additional cost information.

Tomorrow we’ll go through the clear and conspicuous standards, which help to explain what “equal prominence and in close proximity” mean, along with some other amendments to the HELOC advertising rules.