Unsecured LOC / Demand Feature / Overdraft Service

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  • #6574
    Mary Frances

    2 Questions….

    1. I am trying to find in Reg. Z if a demand feature is allowable on an unsecured line of credit. So far I have found 1026.17(c)(5) and 1026.18(i) which, I believe, is for closed end mortgage loans. We tried to build a LOC/demand feature product in our loan software and it will not allow us to check the box for the demand feature. Which leads us to believe that a demand feature is not allowed. Where can I find this in the Reg?

    2. If we tie the unsecured LOC to a DDA will it be viewed as an overdraft product? We currently do not have an overdraft product. I have found in 1005.17:

    § 1005.17 Requirements for overdraft services.

    (a) Definition. For purposes of this section, the term “overdraft service” means a service under which a financial institution assesses a fee or charge on a consumer’s account held by the institution for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account. The term “overdraft service” does not include any payment of overdrafts pursuant to:

    (1) A line of credit subject to Regulation Z (12 CFR part 1026), including transfers from a credit card account, home equity line of credit, or overdraft line of credit;

    (2) A service that transfers funds from another account held individually or jointly by a consumer, such as a savings account; or

    (3) A line of credit or other transaction exempt from Regulation Z (12 CFR part 1026) pursuant to 12 CFR 1026.3(d).

    I am interpreting this to mean that the LOC would not be considered an overdraft service. Is this correct?

    Thanks for any help


    Response by Jack Holzknecht:

    Question 1: There is nothing in regulation Z that specifically prohibits a demand feature on an unsecured line of credit. A demand feature would not work on a HELOC since the Regulation specifically defines the terms of default for that type of credit. If your LOS won’t allow a demand feature then that option appears closed for you.

    Question 2: If you tie a LOC to a DDA it is a overdraft line of credit, but as you pointed out, it is not an “overdraft product” for purposes of Regulation E.

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