Regulation E and Automatically Debiting Loan Payments

Issue/Inquiry

The Bank offers a Home Equity Line of Credit (“HELOC”) product that requires a monthly automatic debit from a Bank checking account of an ACH from another financial institution. There is no discount to the rate and no fee is charged. Is this an acceptable practice?

Response Summary

Regulation E does not permit a financial institution to condition a HELOC to a consumer on the consumer’s repayment by preauthorized electronic fund transfers.

Response Detail

Under Regulation E, a financial institution may not condition an extension of credit to a consumer on the consumer’s repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or to maintain a specified minimum balance in the consumer’s account. 12 CFR §1005.10(e)(1).

This means that a financial institution may not require repayment of loans by electronic means on a preauthorized, recurring basis. An institution may offer a program with a reduced annual percentage rate or other cost-related incentive for an automatic repayment feature, provided the program with the automatic payment feature is not the only loan program offered by the creditor for the type of credit involved. Examples of such a permitted program include:

• Mortgages with graduated payments in which a pledged savings account is automatically debited during an initial period to supplement the monthly payments made by the borrower.
• Mortgage plans calling for preauthorized biweekly payments that are debited electronically to the consumer’s account and produce a lower total finance charge. Official Interpretations, 1005.10(e)(1) – 1.

In this case, the Bank is requiring the automatic debiting of HELOC payments from the borrower’s checking account. As noted, Regulation E does not permit conditioning a HELOC upon the consumer’s repayment by preauthorized electronic fund transfers.

The Bank may offer an incentive to the consumer for agreeing to the automatic debiting of HELOC payments, such as a reduced annual percentage rate, but the credit may not be conditioned upon such agreement, and a HELOC product must be made available which does not require the automatic debiting of payments.

This entry was posted on Monday, July 23rd, 2018 at 6:00 am.