Article By: Ben Giumarra, Spillane Consulting Associates, Inc.
An area that’s due for some clarity – HELOC lending pursuant to Federal and Massachusetts rules regarding late charges and prepayment penalties.
I always expect HELOCs to be simple – they’re exempt from many of the trickiest new regulations (ATR/QM, LO Comp, TRID, etc) – but time and again a HELOC-related issue seems to stop the presses at 501 John Mahar Highway. I think back to figuring out how to service “freeze-lock” lines of credit, pouring over a pool of HELOCs used to finance downpayments, and deciphering right-of-rescission rules when HELOC proceeds are used for different purposes.
So I decided to reduce one of these tricky issues to writing – as much for your benefit as mine. The issue I’m referring to involves permissible limits for late charges and prepayment penalties, so I’ll pose these 2 questions:
- Are there any limits to Late Charges for HELOCs? (lending in Massachusetts)
- Are there any limits to Pre-Payment Penalties for HELOCs? (lending in Massachusetts)
Massachusetts limits Late Charges on HELOCs to 10% or $10, whichever is less. The common mistake here is to apply the general Massachusetts rule that limits late charges to 3% of the overdue principal and interest. While the general rule (Chapter 183, Section 59) appears to apply, the Division of Banks has provided clear guidance (Opinion 95-130) stating that it interprets the more specific rule for HELOCs (Chapter 140, Section 114B) to apply. The more specific rule limits late charges to 10% or $10, whichever is less. Read the full language of this MA rule here (not a fun read).
So check your loan docs to make sure this is correct!
Note that there are no Federal limitations on HELOC late charges except when the High-Cost rules are triggered, and then late charges are generally limited to 4% of the amount overdue.
So we know that pre-payment penalties got the cold shoulder under Dodd Frank – and the CFPB’s ensuing regulations drastically limited our ability to charge pre-payment penalties on closed-end loans. But open-end lines of credit largely escaped this (as they did many Dodd Frank/CFPB rules).
There is actually no rule limiting prepayment penalties from Massachusetts. There is a general rule that limits prepayment penalties in Mass. (Prepayment statute). Here again, there would be uncertainty about whether this general statute applies to HELOCs (instead of just closed-end loans) were it not for crystal clear guidance from the Division of Banks: Advisory Letter (2004). Here the Division settled once and for all that the pre-payment penalty statute does not apply to open-end lines of credit – so HELOCs are exempt!
Nonetheless, this is still a common mistake made – so make sure you’re not trying to comply with the prepayment statute when it doesn’t apply at all. Scrub this from your HELOC notes and disclosures!
There’s no direct rule against pre-payment penalties in TILA or any other Federal regulation — BUT any HELOC will trigger High-Cost regulations if it has a term that allows for a prepayment penalty to either (a) be charged more than 36 months after account opening OR (b) exceed 2% of the initial credit limit.
Example: Your HELOC docs impose a termination fee of $450. You may not even intend to enforce this. You provide a HELOC to a consumer with an initial credit limit of $20,000. Because $450 is greater than 2% of $20,000, this HELOC is automatically classified as “High-Cost.”
So a couple of key points here:
- You don’t have to actually charge the penalty – accidentally leaving it in the note or one of the disclosures appears to be enough – so a mistake here will leave your HELOCs all automatically classified as High-Cost
- Many lenders deal with “higher-priced” limitations – no sweat! But most lenders will try to avoid “High-Cost” regulations whenever possible because they’re so tough. Some examples include additional requirements for counseling, late charges (see above), heightened underwriting rules (essentially ATR/QM for HELOCs) and more.
Extra Note: Reimbursement fee is not a “pre-payment penalty”
This is a big exception. A fee charged when a borrower cancels a HELOC early that is merely to recover the cost of a waived 3rd party fee is not considered a pre-payment penalty (if it is limited to 36 months from account opening). See TILA 1026.32(b)(6) for details.
In Other News
- Fannie enhances guidelines for borrowers with student loans.
- Cool article format – the B&T’s Jim Morrison spotlighting a local real estate agent – article starts off as follows …
- “After more than a decade working for banks and high tech companies, Marie Presti found herself re-evaluating her life in the aftermath of the September 11 attacks in 2001. Today, she owns and manages an intentionally small real estate firm. She also volunteers for several real estate associations and recently became president-elect of the Greater Boston Association of Realtors”
- What is your whistle-blower policy? … Increasing need for independence is making us consider setting this up as a service for clients (plus benefit of economies of scale).
- MBA reports that purchase apps are up and refis are down.
On My Mind …
How do we avoid allow our services become commodotized? Ray Davis of Umpqua Bank had some intriguing thoughts in his book Leading Through Uncertainty:
So if I put a very attractive savings account interest rate in the paper that’s way above the competition, I’m going to get more business than I know what to do with. By succumbing to this tactic, however, I’m agreeing to compete with price or rates–to reinforce my position as a commodity. Unless you’re a big-box retailer where this is part of your value proposition, you’ve just put your company in a death spiral that you’ll be hard pressed to escape. … Becoming a commodity isn’t a recipe for long-term success in banking or any other industry or business. I’m more interested in creating real value for our customers and then building buzz about our bank.
“The first step is to establish that something is possible; then probability will occur.”
– Elon Musk
Thank you to Ben Giumarra, Spillane Consulting Associates, Inc., a member of our Education Committee, who with the support of other experts at SCA have put together this newsletter.