Regulation Z Compliance Audit —
HELOC/Open-End Credit Requirements, Loan Originations
Regulation Z (Truth in Lending, 12 CFR 1026) governs open-end credit transactions regardless of
whether residential real estate is involved as collateral. Open-end credit is defined as consumer credit
extended by a bank under a plan in which the bank reasonably contemplates repeated transactions; the
bank may impose a finance charge from time to time on an outstanding unpaid balance; and the amount of
credit that may be extended to the consumer during the term of the plan (up to any limit set by the bank)
is generally made available to the extent that any outstanding balance is repaid. In general, this audit
applies to home equity lines of credit (HELOCs) and overdraft lines of credit. It does not contain
origination disclosures for credit cards or for lines of credit accessed solely by account numbers. Please
use the Consumer Credit Card Compliance Audit for those rules.
For closed-end loans secured with real estate, see Real Estate Loan Requirements — Regulation Z
Compliance Audit. For closed-end loans not secured with real estate, see Non-Real Estate Loan
Requirements Compliance Audit.
The regulation governs, among other things, what information is required to be disclosed and the timing
of such disclosures for open-end credit. Additional restrictions are imposed on transactions secured by the
consumer’s dwelling, such as credit line freezing and termination.
The following should be reviewed for compliance with Regulation Z’s open-end credit provisions:
•
Initial disclosures for each type of open-end credit offered
•
Samples of each type of credit extended to consumers
•
Samples of instances when consumers’ home equity lines were frozen or terminated
•
Record retention (See Regulation Z’s general retention provisions.)
Terms and other contract provisions contained in the disclosures should be compared to actual procedures
and systems to ensure consistency. Interviews should be conducted with the personnel responsible for
complying with the disclosure timing and content requirements to ensure that practice is consistent with
procedures.
The following checklist should be modified to fit the specifics of your institution.
OPEN-END CREDIT REQUIREMENTS
Yes,
No
N/A
General Disclosure Requirements (12 CFR 1026.5)
Work
Paper
Reference
Comments
1.
Does the bank make account opening disclosures
for open-end credit clearly and conspicuously in
writing and in a form the consumer may keep,
except for certain exceptions contained in the
regulation?
2. Are the terms “finance charge” and “annual
percentage rate” (APR), when required to be
disclosed, more conspicuous than any other required
disclosure, except for certain exceptions contained in
the regulation?
3. Does the bank furnish the account opening
disclosure statement before the first transaction is
made under the plan?
4. Does the bank mail or deliver a periodic statement
for each billing cycle at the end of which an account
has a debit or credit balance of more than $1 or on
which a finance charge has been imposed?
5. Does the bank mail or deliver the periodic statement
at least 21 days prior to any date or the end of any
specific time period in order for the consumer to
avoid an additional finance or other charge, or does
the bank refrain from collecting any finance or other
charge imposed as a result?
6. Do disclosures reflect the terms of the legal
obligation between the parties?
7. If any information necessary for accurate disclosure
is unknown to the bank, does it make the disclosure
based on the best information reasonably available
and state clearly that the disclosure is an estimate?
8.
Does the bank make the disclosures to each
consumer having the right to rescind, if the right of
rescission is applicable?
Home Equity Plan Requirements (Secured by the
Consumer’s Dwelling) (12 CFR 1026.40)
9. Are the application disclosures made clearly and
conspicuously and grouped together and segregated
from all unrelated information (except the
itemization of third-party fees and the variable-rate
information)?
10. Do the first four disclosures contained in question 12
precede the other required disclosures?
11. Are the application disclosure and brochure
provided at the time an application is provided to the
consumer, unless application is not made in person?
12. Does the home equity application disclosure contain
the following, as applicable:
•
Statement that the consumer should make or
otherwise retain a copy of the disclosures?
•
Conditions for disclosed terms:
— Statement of when the consumer must
submit an application to obtain disclosed
terms and identification of any term that is
subject to change?
— Statement that, if a disclosed term changes
(other than a variable-rate index fluctuation)
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?
•
Statement that the bank will acquire a security
interest in the consumer’s dwelling and that loss
of the dwelling may occur in the event of
default?
•
Possible actions by the bank:
— Statement that, under certain conditions, the
bank may terminate the plan and require
payment of the outstanding balance in full
and impose fees, prohibit additional
extensions of credit or reduce the credit
limit, and implement certain changes in the
plan?
— Statement that the consumer may receive,
upon request, information about the
conditions under which such actions may
occur or a statement of such conditions?
•
Payment terms of the plan, including:
— Length of the draw and any repayment
period?
— Explanation of how the minimum periodic
payment will be determined and the timing
of the payments for the draw and repayment
period?
— 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?
— Example, based on a $10,000 outstanding
balance as stipulated in the regulation?
•
Annual percentage rate?
•
Itemization of any fees to open, use, or maintain
the plan, and when such fees are payable?
•
Good faith estimate, stated as a single dollar
amount or range, of any fees that may be
imposed by persons other than the bank to open
the plan, as well as a statement that the
consumer may receive a good faith itemization
of such fees (or the itemization of such fees may
be provided)?
•
Statement that negative amortization may occur
and that negative amortization increases the
principal balance and reduces the consumer’s
equity?
•
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?
•
Statement that the consumer should consult a tax
advisor regarding the deductibility of interest
and charges under the plan?
•
For a plan in which the annual percentage rate is
variable, the following disclosures, as
applicable:
— Fact that the annual percentage rate,
payment, or term may change due to the
variable-rate feature?
— Statement that the annual percentage rate
does not include costs other than interest?
— Index used in making rate adjustments and a
source of information about the index?
— Explanation of how the annual percentage
rate will be determined, including how the
index is adjusted?
— Statement that the consumer should ask
about the current index value, margin,
discount or premium, and annual percentage
rate?
— 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?
— Frequency of changes in the
percentage rate?
annual
— Any rules relating to changes in the index
value, the annual percentage rate, and the
payment amount, such as an explanation of
payment limitations and rate carryover?
— 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 the
maximum annual percentage rate that may
be imposed under each payment option?
— 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?
— Historical example, based on a $10,000
extension of credit, as required under this
section?
— Statement that rate information will be
provided on or with each periodic
statement?
13. Does the bank provide the home equity brochure
published by the Consumer Financial Protection
Bureau (CFPB) or a suitable substitute?
14. Does the bank refrain from:
•
Changing the annual percentage rate unless such
change is based on an index that is not under the
bank’s control and such index is available to the
general public?
•
Terminating a plan and demanding repayment of
the entire outstanding balance in advance of the
original term (except for reverse mortgage
transactions) unless one of the events specified
in the regulation allowing such action takes
place?
•
Changing any term, except certain items and
under certain conditions contained in the
regulation?
•
Terminating a plan and demanding repayment of
the entire outstanding balance in advance of the
original term for certain reverse mortgage
transactions unless one of the events specified in
the regulation allowing such action takes place?
15. Does the bank refund all fees paid by the consumer
if any term required to be disclosed changes (other
than fluctuations in a variable-rate plan index)
before the plan is opened and, as a result, the
consumer elects not to open the plan?
16. Does the bank refrain from imposing on its own
behalf, or on the behalf of any other person, a
nonrefundable fee in connection with an application
until three business days after the consumer receives
the disclosures and brochure?
Account Opening Disclosures (12 CFR 1026.6(b)) —
Open-End Plans Not Secured With Real Estate
17. Does the bank use the model format provided in the
regulation for the items below that are required to be
in the table? (See Appendix A for the model form
from the regulation.)
18. Does the information in the table include the
following information:
•
Each periodic rate (APR) for purchases, a cash
advance, or balance transfer?
Note: The APR for purchases disclosed pursuant to this
paragraph shall be in at least 16-point type, except for a
penalty rate that may apply upon the occurrence of one
or more specific events.
•
The fact that any of the rates may vary,
including the following information about the
variable rate:
— How the rate is determined?
— The circumstances and frequency under
which it may increase?
— Limitations on and effects of an increase?
•
The fact that the rates are discounted or
premium rates, if applicable?
Note: If the rates are introductory
you may include them in the table
period that the rate will be in effect
the rate that will be applied after
temporary rate has expired.
•
or temporary rates,
as long as the time
is also included and
the introductory or
If a rate may increase due to a late payment or
over-the-limit transaction, is that rate disclosed
along with the circumstances under which the
rate will apply?
You may, at your option, include any APR that
varies by state or is based on the consumer's
creditworthiness at the time the credit card is
established or the range of the APRs.
Note: If the disclosure includes a statement that the APR
varies by state, or will be determined based on the
consumer's creditworthiness, and refers the consumer to
the account agreement or other disclosure provided with
the account-opening table where the APR applicable to
the consumer's account is disclosed, you may not list
APRs for multiple states in the account-opening table.
Fee Disclosures
19. Are any fees charged for opening or maintaining the
plan, including how frequently it is imposed and the
annualized amount of the fee?
Note: If the fee is a one-time fee, you must disclose that
fact.
20. Any fixed finance charge with a description and
any minimum interest charge that exceeds the
amount calculated and published by the CFPB
annually ($1 for 2010) that could be imposed during
a billing cycle?
21. Any transaction charges imposed for the use of the
card?
22. The length or range of any "grace period" or the fact
that there is none?
Note: In disclosing in the tabular format a grace period
that applies to all types of purchases, the phrase "How to
Avoid Paying Interest on Purchases" shall be used as the
heading for the row describing the grace period. If a
grace period is not offered on all types of purchases, in
disclosing this fact in the tabular format, the phrase
"Paying Interest" shall be used as the heading for the
row describing this fact.
23. The balance calculation method chosen by the bank
(which does not have to be in the table)?
24. The following fees, if applicable:
•
Cash advance?
•
Over-the-limit?
•
Balance transfer?
•
Returned payment fee?
25. Any required insurance or debt cancellation or
suspension coverage?
26. Any fees for the issuance or availability of credit, or
requirement of a security deposit for such credit, and
the total amount of those required fees and/or
security deposit that will be imposed and charged to
the account when the account is opened is 15 percent
or more of the minimum credit limit for the card?
27. Billing error rights reference (this statement does
not have to be inside the table)?
28. Charges imposed as part of the plan, as applicable:
•
Finance charges?
•
Dormant or inactivity fees
•
Taxes?
•
Late payment fees?
•
Fees for closing account?
•
Voluntary credit insurance?
29. Do the disclosures state the fact that creditor has or
will have a security interest in the property purchase
or any other type of security interest?
30. Does the bank refrain from charging credit card
customers more than 25 percent in fees during the
first year the account is opened?
Account Disclosures for Home Equity Lines of Credit
(12 CFR 1026.6(a))
31. Do the bank's HELOC account opening disclosures
include the following information:
•
Finance charge?
•
When the finance charge will begin to accrue?
•
Each periodic rate used to compute the finance
charge, the range of balances to which it applies,
and the corresponding APR?
•
The method used to determine the balance on
which the finance charge may be computed?
•
How the amount of any finance charge will be
determined?
•
Any other charges that may be imposed?
•
A statement of the conditions under which the
creditor may take certain action?
•
The payment information for the draw and
repayment period?
•
A statement that negative amortization may
occur, if applicable?
•
A statement of any transaction requirements,
such as a minimum draw?
•
A statement regarding the tax implications of the
plan?
•
A statement that the APR does not include costs
other than interest?
•
Variable rate disclosures described in the
application disclosures, unless the application
disclosures were in a form the consumer may
keep?
•
Any security interest for the line of credit?
•
Statement of billing rights?
32. Does the HELOC agreement, if the loan is secured
by the consumer’s principal dwelling, not include
clauses that prohibit arbitration or restrictions on the
consumer’s right to litigation?
High-Cost Mortgages, Reverse Mortgages (12 CFR
1026.32, 12 CFR 1026.33)
33. Determine whether the bank originates consumer
credit transactions subject to Subpart E of
Regulation Z; specifically, high-cost mortgages (12
CFR 1026.32) and reverse mortgages (12 CFR
1026.33).
34. In addition to compliance with other parts of
Regulation Z, determine if:
•
Required disclosures are provided to consumers
in addition to, not in lieu of, the disclosures
contained in other subparts of Regulation Z. (12
CFR 1026.31(a))
•
Disclosures are clear and conspicuous, in
writing, and in a form that the consumer may
keep. (12 CFR 1026.31(b))
•
Disclosures are furnished at least three business
days prior to consummation or account opening
of a high-cost mortgage or a closed-end reverse
mortgage transaction (or at least three business
days prior to the first transaction under an openend reverse mortgage). (12 CFR 1026.31(c))
•
Disclosures reflect the terms of the legal
obligation between the parties. (12 CFR
1026.31(d))
•
If the transaction involves more than one lender,
that only one lender provided the disclosures.
Where the obligation involves multiple
consumers, ensure that the disclosures were
provided to any consumer who is primarily
liable on the obligation. Further, for rescindable
transactions, verify that the disclosures were
provided to each consumer who has the right to
rescind. (12 CFR 1026.31(e))
•
The APR is accurately calculated and disclosed
in accordance with the requirements and within
the tolerances allowed in 12 CFR 1026.22 for
closed-end credit transactions. (12 CFR
1026.31(g))
35. For high-cost mortgages (12 CFR 1026.32), ensure
that the lender follows these additional rules
concerning the disclosures required by 12 CFR
1026.32(c):
•
Determine if a new disclosure is required if,
subsequent to providing the additional
disclosure but prior to consummation or account
opening, the lender changes any terms that make
the disclosures inaccurate. For example, if a
consumer finances the payment of premiums or
other charges as permitted under 12 CFR
1026.34(a)(10) and, as a result, the monthly
payment differs from the payment previously
disclosed, re-disclosure is required and a new
three-day waiting period applies. (12 CFR
1026.31(c)(1)(i))
•
Determine if a lender provides new disclosures
by telephone when the consumer initiates a
change in terms, then prior to or at
consummation or account opening the lender
must provide new written disclosures and both
parties must sign a statement that these new
disclosures were provided by telephone at least
three days prior to consummation or account
opening. (12 CFR 1026.31(c)(1)(ii))
•
If a consumer waives the right to a three-day
waiting period to meet a bona fide personal
financial emergency, the consumer’s waiver
must be a dated written statement (not a preprinted form) describing the emergency and
bearing the signature of all the consumers
entitled to the waiting period (a consumer can
waive only after receiving the required
disclosures and prior to consummation or
account opening). (12 CFR 1026.31(c)(1)(iii))
36. For high-cost mortgages (12 CFR 1026.32),
determine that the lender has not included any of the
following loan terms:
•
A payment schedule that provides for a balloon
payment (with exceptions). (12 CFR
1026.32(d)(1)(i)-(iii))
•
Negative amortization. (12 CFR 1026.32(d)(2))
•
Advance payments from the proceeds of more
than two periodic payments. (12 CFR
1026.32(d)(3))
•
Increased interest rate after default. (12 CFR
1026.32(d)(4))
•
A rebate of interest, arising from a loan
acceleration due to default, calculated by a
method less favorable than the actuarial method.
(12 CFR 1026.32(d)(5))
•
Prepayment penalty as defined in 12 CFR
1026.32(b)(6).
•
A due-on-demand clause that permits the lender
to terminate the loan in advance of maturity and
accelerate the balance, except in cases of fraud
or material misrepresentation by the consumer,
failure by the consumer to meet the repayment
terms of the agreement for any outstanding
balance, or action or inaction by the consumer
that adversely affects the lender’s security
interest in the loan. (12 CFR 1026.32(d)(8))
37. For high-cost mortgages under 12 CFR 1026.32,
determine that the lender is not engaged in the
following acts and practices:
•
Home improvement contracts — paying a
contractor under a home improvement contract
from the proceeds of a mortgage unless certain
conditions are met. (12 CFR 1026.34(a)(1))
•
Notice to assignee — selling or otherwise
assigning a high-cost mortgage without
furnishing the required statement to the
purchaser or assignee. (12 CFR 1026.34(a)(2))
•
Refinancing within one year of extending credit
— within one year of making a high-cost
mortgage, a lender may not refinance any highcost mortgage to the same consumer into
another high-cost mortgage that is not in the
consumer’s interest. This also applies to
assignees that hold or service the high-cost
mortgage. Commentary to 12 CFR
1026.34(a)(3) has examples applying the
refinancing prohibition and addressing
“consumer’s interest.” (12 CFR 1026.34(a)(3))
•
Extending high-cost mortgage credit without
regard to the consumer’s repayment ability.
(Temporary or bridge loans with a term of 12
months or less are exempt from this
requirement.) (12 CFR 1026.34(a)(4)):
— For closed-end credit transactions that are
high-cost mortgages, ensure the lender is
complying with the repayment ability
requirements set forth in 12 CFR 1026.43.
— For open-end credit plans that are high-cost
mortgages, ensure the lender is not
extending credit without regard to the
consumer’s repayment ability as of account
opening, including the consumer’s current
and reasonably expected income, current
obligations, assets other than collateral, and
employment.
38. Does the lender determine repayment ability for
open-end high-cost mortgages by:
•
Verifying amounts of income or assets that it
relies on to determine repayment ability,
including expected income or assets, by the
consumer’s Internal Revenue Service Form W2, tax returns, payroll receipts, bank records, or
other third-party documents that provide
reasonably reliable evidence of the consumer’s
income or assets?
•
Verifying the consumer’s current obligations,
including any mortgage-related obligations that
are required by another credit obligation
undertaken prior to or at account opening and
secured by the same dwelling that secures the
high-cost mortgage?
•
Alternatively, determining whether the lender
complies with the repayment ability requirement
by:
— Verifying repayment ability as described
above?
— Determining the consumer’s repayment
ability by using the largest required
minimum periodic payment based on the
assumptions that:
–
The consumer borrows the full credit
line at account opening with no
additional extensions of credit?
–
The consumer makes only required
minimum periodic payments during the
draw period and any repayment period?
–
If the annual percentage rate can
increase during the plan, the maximum
percentage rate that is included in the
contract? and
— Assessing the consumer’s repayment ability,
taking into account at least one of the
following: the ratio of total debt obligations
to income (including any mortgage-related
obligations that are required by another
credit obligation undertaken prior to or at
account opening, and are secured by the
same dwelling that secures the high-cost
mortgage transaction, or the income the
consumer will have after paying debt
obligations. (12 CFR 1026.34(a)(4))?
39. Determine whether the lender extending a high-cost
mortgage received written certification confirming
that the consumer received approved
homeownership counseling after receiving the initial
GFE or, for open-end credit plans, the initial TILA
disclosure. (12 CFR 1026.34(a)(5)). Requirements
include:
•
Verifying that homeownership counseling was
not provided by an employee or affiliate of the
lender.
•
If the lender paid fees associated with
homeownership counseling, confirming that the
payment was not contingent upon the consumer
obtaining the high-cost mortgage or receipt of a
counseling certification.
•
Verifying that the counseling certificate contains
the name of the consumer, date of counseling,
name and address of the counselor, and
statements required by 12 CFR
1026.34(a)(5)(iv).
40. For high-cost mortgages, confirm that late payment
charges are disclosed in the terms of the loan
contract or open-end credit agreement and that such
fees do not exceed four percent of the amount past
due. No such charge may be imposed more than
once for a single late payment. (12 CFR
1026.34(a)(8))