Regulatory Tripwire! Home Equity Line of Credit Statement Format

9/7/2017 - By Jennifer Paradise, CRCM

Although this topic is not new, it continues to surface from time to time. I want to share a reminder of the regulatory requirements for properly disclosing on the borrower's initial periodic statement for a Home Equity Line of Credit (HELOC) the account-opening (start-up) fees paid out of the first advance. Section 1026.7 of Regulation Z (Truth-in-Lending Act - "TILA") permits institutions to choose between two different periodic statement formats for HELOCs:

The format for home-secured lines under Section 1026.7(a), or:
The format for not home secured lines under Section 1026.7(b)

You might be asking why the regulation permits the not home-secured lines format for home-secured lines (HELOCs). The answer is who knows - our lawmakers don't always make sense.

HELOC Statements under Section 1026.7(a)

If you choose the format for home-secured lines under Section 1026.7(a), you must disclose “finance charges,” using that term. Each account-opening (start-up) fee paid out of the first advance that is considered a finance charge under Regulation Z must be separately itemized and labeled as on the first periodic statement.

For example, Finance Charge – Flood Determination: $15. If you do not disclose finance charges in this way, you will understate the finance charge, which is a violation and could result in potential reimbursement to borrowers. The terms "Closing Costs" or "Settlement Costs," may be used to describe charges imposed in connection with real estate transactions that are excluded from the finance charge under Regulation Z, IF the same term (such as "Closing Costs") was used in the initial HELOC disclosures (that is, the Note/Credit Agreement and Disclosure) AND if the creditor chose to itemize and individually disclose the costs included in that term.

Otherwise, if you don't meet the "IF/AND" test, to the charges should be separately itemized, using the same term that was used on the Note/Credit Agreement and Disclosure).

HELOC Statements under Section 1026.7(b)

If you choose the format for not home secured lines under Section 1026.7(b), you are not required to disclose “finance charges,” using that term. Instead, each account-opening (start-up) fee paid out of the first advance must be separately itemized and grouped together under the heading "Fees" on the first periodic statement.

A total of charges, using the term "Fees," must be disclosed for the statement period and year-to-date period using a format substantially similar to Sample G-18(A) in Appendix G of Regulation Z. Therefore, in using the periodic statement format 1026.7(b) [for not home-secured lines], an institution could never understate the finance charge, since the finance charge is not a required disclosure.

Conclusion

We recommend asking your loan operations department to identify loan numbers for a few HELOCs for which the costs were drawn from the initial advance, and review the initial HELOC statements. Verify fees and charges were disclosed properly (according to the format you use) so that you can make any necessary corrections before your examiners ask for a file… that by some miracle, or curse, had fees paid from the initial advance.

If you have any questions or concerns about HELOC statements or other issues, email me or any member of our Financial Institutions Consulting Team.

About the Author | Jennifer Paradise, CRCM

Jennifer is a consultant in the Financial Institutions Advisory Group at Saltmarsh, Cleaveland & Gund and has been serving the financial institutions industry since 1990. She is primarily involved in performing fair lending, loan internal audit, loan compliance, and other consulting services for the firm's financial institution clients throughout the region.

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