Regulation Z and Calculating HELOC Payments for Underwriting Purposes

Issue/Inquiry

The Bank’s Home Equity Line of Credit (“HELOC”) product offers a draw period for 10 years, with interest-only payments fixed at the current prime rate for the first six months, then adjusting to the floating prime rate. After the draw period, the line converts to a 15-year term, with interest floating at prime. For underwriting purposes, what is best practice for calculating the monthly payment?

Response Summary

The Regulation Z ability-to-repay rules for high-cost mortgages, which include HELOCs, provide instructions for determining the maximum payment amount the consumer will be required to pay.

Response Detail

The Interagency Credit Risk Management Guidance for Home Equity Lending emphasizes the importance of prudently underwriting home equity loans. This should include an assessment of the borrower’s ability to amortize a fully drawn line over the loan term and to absorb potential increases in interest rates. Likewise, the Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Period states that prudent underwriting and loss mitigation strategies should involve an evaluation of the borrower’s willingness and ability to repay the loan.

Neither guidance prescribes how the borrower’s ability-to-repay or the monthly payment for a HELOC should be calculated.

Regulation Z has ability-to-repay requirements for mortgage loans secured by a dwelling, but these are not applicable to HELOCs. 12 CFR §1026.43(a),(c). The regulation also has ability-to-repay requirements pertaining to high-cost mortgages, and these do apply to HELOCs. 12 CFR 1026.32(a)(1), 34(a)(4).

For open-end credit subject to the high-cost mortgage rules, a creditor must determine the consumer’s ability to pay the principal and interest obligation based on the maximum scheduled payment. Official Interpretations, 1026.34(a)(4)(iii)(B) – 1.

The maximum scheduled payment for a HELOC that is amortized over the repayment period will be based on the following assumptions:

• The consumer borrows the full credit line at account opening with no additional extensions of credit
• The consumer makes only minimum periodic payments during the draw period and any repayment period
• If the annual percentage rate may increase during the plan, the maximum annual percentage rate that is included in the contract applies to the plan at account opening
• The payment is sufficient to amortize the outstanding balance over the amortization period. Official Interpretations, 1026.32(c)(3)(i) – 1;(c)(4) – 1.

While the HELOCs made by the Bank may not necessarily be high-cost mortgages, the method for calculating the monthly loan payment of such mortgages can be used as well for calculating the monthly payment for underwriting purposes.

In this case, the Bank would base the maximum scheduled payment on the credit limit of the HELOC, amortized over 15 years, at the maximum annual percentage rate that could be charged under the plan.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, August 31st, 2020 at 8:22 am.