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A question we received from a member:
I am probably just getting things confused in my mind, I thought I had all of this straight until Friday’s CMG, until Jack referred to HELOCs being subject to ATR, so I have gone back to review that. I submitted a question during the session that Jack did not have time to answer regarding HELOCs because he referred to HELCOs being subject to ATR under 1026.34.
After reviewing 1026.34 I want to verify I understand this correctly. If our HELOC terms are index of Prime + 1% margin, no discount or premium, interest only for 10 years, would the fully indexed rate for purposes of the HOEPA test be Prime + 1%? If so, and there is no prepayment penalty, and the fee test determined it is not a HOEPA/HCML, then since it is not a HCML, would it still be subject to ATR/.34?
HELOCs are exempt from 1026.43, Ability to Repay/QM rules. However, if you have a high-cost mortgage loan (aka HOEPA, Sect. 32 Loan, or HCML) that is open-end (e.g. HELOC) then there are repayment ability requirements you must meet in 1026.34(a)(4).
The HOEPA coverage test is outlined below and includes an APR test, Points and Fees test and Prepayment Penalty test. If you do not have a HOEPA loan based on any of these test the HELOC ability to repay will not apply to the transaction.
1026.32(a) Coverage. (1) The requirements of this section apply to a high-cost mortgage, which is any consumer credit transaction that is secured by the consumer’s principal dwelling, other than as provided in paragraph (a)(2) of this section, and in which:
(i) The annual percentage rate applicable to the transaction, as determined in accordance with paragraph (a)(3) of this section, will exceed the average prime offer rate, as defined in § 1026.35(a)(2), for a comparable transaction by more than:
(A) 6.5 percentage points for a first-lien transaction, other than as described in paragraph (a)(1)(i)(B) of this section;
(B) 8.5 percentage points for a first-lien transaction if the dwelling is personal property and the loan amount is less than $50,000; or
(C) 8.5 percentage points for a subordinate-lien transaction; or
(ii) The transaction’s total points and fees, as defined in paragraphs (b)(1) and (2) of this section, will exceed:
(A) 5 percent of the total loan amount for a transaction with a loan amount of $20,000 or more; the $20,000 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1; or
(B) The lesser of 8 percent of the total loan amount or $1,000 for a transaction with a loan amount of less than $20,000; the $1,000 and $20,000 figures shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1; or
(iii) Under the terms of the loan contract or open-end credit agreement, the creditor can charge a prepayment penalty, as defined in paragraph (b)(6) of this section, more than 36 months after consummation or account opening, or prepayment penalties that can exceed, in total, more than 2 percent of the amount prepaid.
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