Compliance Blog

Happy November everyone! I hope you had a great Halloween. We’ve now entered my favorite two months of the year. Food, holidays, and sweaters, the perfect trifecta. What’s not always perfect? Disclosures. Today on the compliance blog, I am going to be discussing application and account opening disclosures for Home Equity Lines of Credit (HELOCs).

Required Disclosures at Application

Unlike other forms of credit, Regulation Z, section 1026.40(b) requires lenders to provide disclosures when a HELOC application is given to a consumer. The requirements to provide these disclosures can be found in section 1026.40(d) and (e).

Content of Application Disclosures

Section 1026.40(d) requires the following disclosures:

1.       A statement that consumers should keep a copy of the disclosures;

2.       When the applicant must submit the application to obtain disclosed terms;

3.       That if the disclosed terms change, the consumer can receive a refund;

4.       That the consumer will be providing a security interest in their dwelling and that they may lose their dwelling if they default;

5.       A list of possible actions the credit union may take and that the consumer may request information regarding when the credit union may undertake those actions;

6.       The payment terms of the plan;

7.       The APR;

8.       Fees that are imposed by the credit union;

9.       Fees imposed by any third parties to open a plan;

10.   That negative amortization may occur;

11.   That consumers should consult with a tax advisor;

12.   For variable-rate plans, various disclosures regarding the variable rate.

Beyond the above disclosures, section 1026.40(e) requires that the credit union provide the brochure titled “What You Should Know About Home Equity Lines of Credit.” Credit unions can find this brochure on the CFPB’s website. Credit unions may substitute another brochure instead of the CFPB’s if the substitute is comparable in substance and comprehensiveness.

Form of Application Disclosures

Before creating the above disclosures, credit unions should review section 1026.40(a), which discusses formatting requirements for the disclosures. Section 1026.40(a) lists the following formatting requirements:

·       The disclosures must be clear and conspicuous, grouped together, and segregated from unrelated information;

·       The disclosures may be provided either on the application or on a separate form; and

·       The disclosures required under section 1026.40(d)(1)-(4)(ii) must precede all other required disclosures.

For electronic applications, section 1026.40(a)(3) requires that the application disclosures be provided in electronic form. Comment 40(a)(1)-5 provides the following examples:

“i. The disclosures could automatically appear on the screen when the application appears;

ii. The disclosures could be located on the same Web page as the application (whether or not they appear on the initial screen), if the application contains a clear and conspicuous reference to the location of the disclosures and indicates that the disclosures contain rate, fee, and other cost information, as applicable;

iii. Creditors could provide a link to the electronic disclosures on or with the application as long as consumers cannot bypass the disclosures before submitting the application. The link would take the consumer to the disclosures, but the consumer need not be required to scroll completely through the disclosures; or

iv. The disclosures could be located on the same Web page as the application without necessarily appearing on the initial screen, immediately preceding the button that the consumer will click to submit the application.”

Credit unions may want to note that if the consumer accesses an application electronically but is physically present in the credit union’s office, the commentary states that the application disclosures may be provided in either paper or electronic form.

Account Opening Disclosures

Now that your applications are set up, it’s time to get ready for opening an account. To do this, credit unions should ensure that another set of disclosures are ready, the account-opening disclosures under section 1026.6. Section 1026.6(a) requires the following to be disclosed:

1.       Under what circumstances will a finance charge be imposed and how the charge will be determined, including;

a.        When the finance charge begins to accrue;

b.       The periodic rates that may be used to compute the finance charge;

c.       How the balance, on which the finance charge is computed, is determined;

d.       How the amount of any finance charges is determined.

2.       A list of other non-finance charges that may be imposed;

a.       Comment 6(a)(2) provides examples of other charges that may be helpful.

3.       Certain disclosures that were required by section 1026.40(d) to be included in the application disclosures;

a.       Credit unions should note that the requirement to disclose this information is separate from the requirements under section 1026.40.

4.       An explanation that the credit union is acquiring a security interest in the property;

5.       A statement outlining the consumer’s rights and the credit union’s responsibilities;

a.       For an example, credit unions can review Model Form G-3 in Appendix G.

Credit unions should note that section 1026.5(b)(1)(i) requires that the above disclosures be provided “before the first transaction is made under the plan.”

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