§ 226.5b Requirements
for home equity plans.
The requirements of this section apply to open-end credit
plans secured by the consumer's dwelling. For purposes of this
section, an annual percentage rate is the annual percentage rate
corresponding to the periodic rate as determined under
§ 226.14(b).
(a) Form of disclosures--(1) General. The
disclosures required by paragraph (d) of this section shall be
made clearly and conspicuously and shall be grouped together and
segregated from all unrelated information. The disclosures may
be provided on the application form or on a separate form. The
disclosure described in paragraph (d)(4)(iii), the itemization
of third-party fees described in paragraph (d)(8), and the
variable-rate information described in paragraph (d)(12) of this
section may be provided separately from the other required
disclosures.
(2) Precedence of certain disclosures. The
disclosures described in paragraph (d)(1) through (4)(ii) of
this section shall precede the other required disclosures.
(b) Time of disclosures. The disclosures and
brochure required by paragraphs (d) and (e) of this section
shall be provided at the time an application is provided to the
consumer.{10a}
{10aThe disclosures and the brochure may be
delivered or placed in the mail not later than three business
days following receipt of a consumer's application in the case
of applications contained in magazines or other publications, or
when the application is received by telephone or through an
intermediary agent or broker.}
(c) Duties of third parties. (1) General. Persons
other than the creditor who provide applications to consumers
for home equity plans must provide the brochure required under
paragraph (e) of this section at the time an application is
provided. If such persons have the disclosures required under
paragraph (d) of this section for a creditor's home equity plan,
they also shall provide the disclosures at such time.10a
(2) Electronic communication. Persons other than
the creditor that are required to comply with paragraphs (d) and
(e) of this section may use electronic communication in
accordance with the requirements of § 226.36, as applicable.
(d) Content of disclosures. The creditor shall
provide the following disclosures, as applicable:
(1) Retention of information. A statement that
the consumer should make or otherwise retain a copy of the
disclosures.
(2) Conditions for disclosed terms. (i) A
statement of the time by which the consumer must submit an
application to obtain specific terms disclosed and an
identification of any disclosed term that is subject to change
prior to opening the plan.
(ii) A statement that, if a disclosed term changes (other
than a change due to fluctuations in the index in a
variable-rate plan) prior to opening the plan and the consumer
therefore elects not to open the plan, the consumer may receive
a refund of all fees paid in connection with the application.
(3) Security interest and risk to home. A
statement that the creditor will acquire a security interest in
the consumer's dwelling and that loss of the dwelling may occur
in the event of default.
(4) Possible actions by creditor. (i) A
statement that, under certain conditions, the creditor may
terminate the plan and require payment of the outstanding
balance in full in a single payment and impose fees upon
termination; prohibit additional extensions of credit or reduce
the credit limit; and, as specified in the initial agreement,
implement certain changes in the plan.
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(ii) A statement that the consumer may receive, upon
request, information about the conditions under which such
actions may occur.
(iii) In lieu of the disclosure required under paragraph
(d)(4)(ii) of this section, a statement of such conditions.
(5) Payment terms. The payment terms of the plan,
including:
(i) The length of the draw period and any repayment
period.
(ii) An explanation of how the minimum periodic payment
will be determined and the timing of the payments. If paying
only the minimum periodic payments may not repay any of the
principal or may repay less than the outstanding balance, a
statement of this fact, as well as a statement that a balloon
payment may result.{10b}
{10bA balloon payment results if paying the minimum
periodic payments does not fully amortize the outstanding
balance by a specified date or time, and the consumer must repay
the entire outstanding balance at such time.}
(iii) An example, based on a $10,000 outstanding balance
and a recent annual percentage rate,{10c}
{10cFor fixed-rate plans, a recent annual
percentage rate is a rate that has been in effect under the plan
within the twelve months preceding the date the disclosures are
provided to the consumer. For variable-rate plans, a recent
annual percentage rate is the most recent rate provided in the
historical example described in paragraph (d)(12)(xi) of this
section or a rate that has been in effect under the plan since
the date of the most recent rate in the table.}
showing the minimum periodic payment, any balloon payment, and
the time it would take to repay the $10,000 outstanding balance
if the consumer made only those payments and obtained no
additional extensions of credit.
If different payment terms may apply to the draw and any
repayment period, or if different payment terms may apply within
either period, the disclosures shall reflect the different
payment terms.
(6) Annual percentage rate. For fixed-rate plans,
a recent annual percentage rate10c imposed under the
plan and a statement that the rate does not include costs other
than interest.
(7) Fees imposed by creditor. An itemization of
any fees imposed by the creditor to open, use, or maintain the
plan, stated as a dollar amount or percentage, and when such
fees are payable.
(8) Fees imposed by third parties to open a plan. A
good faith estimate, stated as a single dollar amount or range,
of any fees that may be imposed by persons other than the
creditor to open the plan, as well as a statement that the
consumer may receive, upon request, a good faith itemization of
such fees. In lieu of the statement, the itemization of such
fees may be provided.
(9) Negative amortization. A statement that
negative amortization may occur and that negative amortization
increases the principal balance and reduces the consumer's
equity in the dwelling.
(10) Transaction requirements. Any limitations on
the number of extensions of credit and the amount of credit that
may be obtained during any time period, as well as any minimum
outstanding balance and minimum draw requirements, stated as
dollar amounts or percentages.
(11) Tax implications. A statement that the
consumer should consult a tax advisor regarding the
deductibility of interest and charges under the plan.
(12) Disclosures for variable-rate plans. For a
plan in which the annual percentage rate is variable, the
following disclosures, as applicable:
(i) The fact that the annual percentage rate, payment, or
term may change due to the variable-rate feature.
(ii) A statement that the annual percentage rate does not
include costs other than interest.
(iii) The index used in making rate adjustments and a
source of information about the index.
(iv) An explanation of how the annual percentage rate
will be determined, including an explanation of how the index is
adjusted, such as by the addition of a margin.
(v) A statement that the consumer should ask about the
current index value, margin, discount or premium, and annual
percentage rate.
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(vi) A statement that the initial annual percentage rate
is not based on the index and margin used to make later rate
adjustments, and the period of time such initial rate will be in
effect.
(vii) The frequency of changes in the annual percentage
rate.
(viii) Any rules relating to changes in the index value
and the annual percentage rate and resulting changes in the
payment amount, including, for example, an explanation of
payment limitations and rate carryover.
(ix) A statement of any annual or more frequent periodic
limitations on changes in the annual percentage rate (or a
statement that no annual limitation exists), as well as a
statement of the maximum annual percentage rate that may be
imposed under each payment option.
(x) The minimum periodic payment required when the
maximum annual percentage rate for each payment option is in
effect for a $10,000 outstanding balance, and a statement of the
earliest date or time the maximum rate may be imposed.
(xi) An historical example, based on a $10,000 extension
of credit, illustrating how annual percentage rates and payments
would have been affected by index value changes implemented
according to the terms of the plan. The historical example shall
be based on the most recent 15 years of index values (selected
for the same time period each year) and shall reflect all
signficant plan terms, such as negative amortization, rate
carryover, rate discounts, and rate and payment limitations,
that would have been affected by the index movement during the
period.
(xii) A statement that rate information will be provided
on or with each periodic statement.
(e) Brochure. The home equity brochure published by
the Board or a suitable substitute shall be provided.
(f) Limitations on home equity plans. No creditor
may, by contract or otherwise:
(1) Change the annual percentage rate unless:
(i) Such change is based on an index that is not under
the creditor's control; and
(ii) Such index is available to the general public.
(2) Terminate a plan and demand repayment of the entire
outstanding balance in advance of the original term (except for
reverse mortgage transactions that are subject to paragraph
(f)(4) of this section) unless:
(i) There is fraud or material misrepresentation by the
consumer in connection with the plan;
(ii) The consumer fails to meet the repayment terms of
the agreement for any outstanding balance;
(iii) Any action or inaction by the consumer adversely
affects the creditor's security for the plan, or any right of
the creditor in such security; or
(iv) Federal law dealing with credit extended by a
depository institution to its executive officers specifically
requires that as a condition of the plan the credit shall become
due and payable on demand, provided that the creditor includes
such a provision in the initial agreement.
(3) Change any term, except that a creditor may:
(i) Provide in the initial agreement that it may prohibit
additional extension of credit or reduce the credit limit during
any period in which the maximum annual percentage rate is
reached. A creditor also may provide in the initial agreement
that specified changes will occur if a specified event takes
place (for example, that the annual percentage rate will
increase a specified amount if the consumer leaves the
creditor's employment).
(ii) Change the index and margin used under the plan if
the original index is no longer available, the new index has an
historical movement substantially similar to that of the
original index, and the new index and margin would have resulted
in an annual percentage rate substantially similar to the rate
in effect at the time the original index became unavailable.
(iii) Make a specified change if the consumer
specifically agrees to it in writing at that time.
(iv) Make a change that will unequivocally benefit the
consumer throughout the remainder of the plan.
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(v) Make an insignificant change to terms.
(vi) Prohibit additional extensions of credit or reduce
the credit limit applicable to an agreement during any period in
which:
(A) The value of the dwelling that secures the plan
declines significantly below the dwelling's appraised value for
purposes of the plan;
(B) The creditor reasonably believes that the consumer
will be unable to fulfill the repayment obligations under the
plan because of a material change in the consumer's financial
circumstances;
(C) The consumer is in default of any material
obligation under the agreement;
(D) The creditor is precluded by government action from
imposing the annual percentage rate provided for in the
agreement;
(E) The priority of the creditor's security interest is
adversely affected by government action to the extent that the
value of the security interest is less than 120 percent of the
credit line; or
(F) The creditor is notified by its regulatory agency
that continued advances constitute an unsafe and unsound
practice.
(4) For reverse mortgage transactions that are subject to
§ 226.33, terminate a plan and demand repayment of the
entire outstanding balance in advance of the original term
except:
(i) In the case of default;
(ii) If the consumer transfers title to the property
securing the note;
(iii) If the consumer ceases using the property securing
the note as the primary dwelling; or
(iv) Upon the consumer's death.
(g) Refund of fees. A creditor shall refund all
fees paid by the consumer to anyone in connection with an
application if any term required to be disclosed under paragraph
(d) of this section changes (other than a change due to
fluctuations in the index in a variable-rate plan) before the
plan is opened and, as a result, the consumer elects not to open
the plan.
(h) Imposition of nonrefundable fees. Neither a
creditor nor any other person may impose a nonrefundable fee in
connection with an application until three business days after
the consumer receives the disclosures and brochure required
under this section.{10d}
{10dIf the disclosures and brochure are mailed to
the consumer, the consumer is considered to have received them
three business days after they are mailed.}
[Codified to 12 C.F.R. § 226.5b]
[Section 226.5b added at 54 Fed. Reg. 24686, June 9, 1989,
effective June 7, 1989, but compliance is optional until
November 7, 1989; amended at 55 Fed. Reg. 38312, September 18,
1990, effective September 18, 1990, but compliance is optional
until October 1, 1991; 57 Fed. Reg. 34681, August 6, 1992,
effective June 29, 1992, but compliance optional until October
1, 1993; 60 Fed. Reg. 15471, March 24, 1995, effective March 22,
1995, compliance is optional until October 1, 1995; 66 Fed. Reg.
17338, March 30, 2001, effective March 30, 2001]
§ 226.16 Advertising.
(a) Actually available terms. If an advertisement for
credit states specific credit terms, it shall state only those
terms that actually are or will be arranged or offered by the
creditor.
(b) Advertisement of terms that require additional
disclosures. If any of the terms required to be disclosed
under
§ 226.6 is set forth in an advertisement, the advertisement
shall also clearly and conspicuously set forth the following:{36d}
{36d The disclosures given in accordance with
§ 226.5a do not constitute advertising terms for purposes of
the requirements of this section.}
(1) Any minimum, fixed, transaction, activity or similar
charge that could be imposed.
(2) Any periodic rate that may be applied expressed as an
annual percentage rate as determined under § 226.14(b). If the
plan provides for a variable periodic rate, that fact shall be
disclosed.
(3) Any membership or participation fee that could be
imposed.
(c) Catalogs or other multiple-page advertisements;
electronic advertisements. (1) If a catalog or other
multiple-page advertisement or an advertisement using electronic
communication, gives information in a table or schedule in
sufficient detail to permit determination of the disclosures
required by paragraph (b) of this section, it shall be
considered a single advertisement if:
(i) The table or schedule is clearly and conspicuously
set forth; and
(ii) Any statement of terms set forth in § 226.6
appearing anywhere else in the catalog or advertisement clearly
refers to the page or location where the table or schedule
begins.
(2) A catalog or other mutiple-page advertisement or an
advertisement using electronic communication complies with this
paragraph if the table or schedule of terms includes all
appropriate disclosures for a representative scale of amounts up
to the level of the more commonly sold higher-priced property or
services offered.
(d) Additional requirements for home equity plans--(1) Advertisement
of terms that require additional disclosures. If any of the
terms required to be disclosed under § 226.6(a) or (b) or the
payment terms of the plan are set forth, affirmatively or
negatively, in an advertisement for a home equity plan subject
to the requirements of
§ 226.5b, the advertisement also shall clearly and
conspicuously set forth the following:
(i) Any loan fee that is a percentage of the credit limit
under the plan and an estimate of any other fees imposed for
opening the plan, stated as a single dollar amount or a
reasonable range.
(ii) Any periodic rate used to compute the finance
charge, expressed as an annual percentage rate as determined
under section
§ 226.14(b).
(iii) The maximum annual percentage rate that may be
imposed in a variable-rate plan.
(2) Discounted and premium rates. If an
advertisement states an initial annual percentage rate that is
not based on the index and margin used to make later rate
adjustments in a variable-rate plan, the advertisement also
shall state the period of time such rate will be in effect, and,
with equal prominence to the initial rate, a reasonably current
annual percentage rate that would have been in effect using the
index and margin.
(3) Balloon payment. If an advertisement contains
a statement about any minimum periodic payment, the
advertisement also shall state, if applicable, that a balloon
payment may result.{36e}
{36e See footnote 10b.}
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(4) Tax implications. An advertisement that states
that any interest expense incurred under the home equity plan is
or may be tax deductible may not be misleading in this regard.
(5) Misleading terms. An advertisement may not
refer to a home equity plan as "free money" or contain a
similarly misleading term.
[Codified to 12 C.F.R. § 226.16]
[Section 226.16 amended at 54 Fed. Reg. 13867, April 6, 1989,
effective April 3, 1989, but compliance is optional until August
31, 1989; 54 Fed. Reg. 24688, June 9, 1989, effective June 7,
1989, but compliance is optional until November 7, 1989; 59 Fed.
Reg. 40204, August 5, 1994, effective July 29, 1994; 59 Fed.
Reg. 63715, December 9, 1994, effective December 8, 1994; 66
Fed. Reg. 17338, March 30, 2001, effective March 30, 2001]
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