HELOC with term option and Reg Z avoidance rule

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    My financial institution offers both Home Equity Term loans and Home Equity Line of Credits. It is our understanding that a financial institution cannot steer a client into an open-end line of credit to avoid the ATR rules applicable to closed end credit set forth in Regulation Z. With that being said, I have seen other financial institutions offer a Home Equity Line of Credit product that has a fixed rate feature built in them. One of our area banks has totally removed Home Equity closed end term loans from its product line-up. the only non conventional mortgage option shown is a HELOC.

    Example… If I were to open a line for $100,000 and use $30,000 of that line for home improvements, I can go to the bank and place the portion used in a fixed rate principal & interest payment or fixed rate interest only payment. As the balance on the fixed portion decreases my line availability increases.

    The question is, is a line of credit with a fixed rate option considered avoiding ATR rules?


    Because the HELOC has a fixed rate doesn’t disqualify it from being an open-end line of credit and doesn’t automatically indicate that the bank is evading the ATR/QM rules. There are banks that have offered fixed rate HELOCs well in advance of this rule. 1026.43 says that a creditor making a loan secured by the consumer’s dwelling that doesn’t have the characteristics of open-end credit, as as defined in 1026.2(a)(20), can not structure a loan as an open-end line of credit in order to evade the ATR/QM rules. So if it isn’t really open end as described below then you can’t call it open-end in order to evade the 1026.43 rules.

    1026.20(a)(2) states:

    (20) Open-end credit means consumer credit extended by a creditor under a plan in which:

    (i) The creditor reasonably contemplates repeated transactions;

    (ii) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and

    (iii) The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

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