Could someone please direct me to the link or regulation that addresses the removal of early termination fee concerning HELOCs? This item came up in a meeting unbeknownst to me. Thanks in advance.

Check out the commentary to 1026.32(a)(1)(iii). It provides examples where a prepayment penalty could cause a HELOC to fall under HOEPA coverage.

So please tell me if anyone else finds it confusing that in the ATR/QM Rule booklet that has the Points and Fees test that it states on page 11 that HELOCS it does not apply to.

However, when going to Reg Z-Part 1026.32 HELOCs are included in the HOEPA calculation!

Depends on which points and fees test.

This is fine and I thank you, but I don't see any reference where it addresses removal of an early termination fee, as I was requested to do so by our lending manager. Am I interpreting this correctly or did I miss something?

I don't understand your question? Your lending manager wants to remove the penalty to meet what goal?

You may not charge or collect a prepayment penalty more than 36 months after transaction closing or permit such fees or penalties to exceed, in the aggregate, more than 2 percent of the amount prepaid on HELOC. All potential HELOC prepayment penalties must be included in the points and fees test.

He mentioned early termination fee not prepayment penalty. I would have to obtain additional information, because this is how he posed the question in a voice mail. Sometimes or in most instances, you have to get the production managers to be more specific in their questions. I agree with your interpretation based on the Reg.

The commentary provides examples of not including bona fide third party charges paid by the bank from the early termination fee. The net over what is essentially recoupment of fees paid by the bank is the fee that counts.

Yes - It would help to know what type of fee is being talked about. It makes it a little difficult to offer any assistance without that knowledge.

Okay. Here's what I found out. They are treating the prepayment penalty as an early termination fee. This is the reason why he made reference to the removal of an early termination fee. From what I've learned, they've now been treating the prepayment penalty as such. I informed him that this is not a good practice as we should want to get rid of all of our prepayment penalties because they cut into the allowable 3% points and fees.

Well, if was legitimately intended as an early termination fee on a no cost HELOC, the bank can recoup its costs. Find out what the reasoning was. If not a no cost plan, what would be recouped to net against the fee? The balance is a prepayment penalty regardless of what it is called.

There are two types of fees.

1) Prepayment penalties

2) Recoupment of waived, bona fide third-party charges

There is no "termination fee". When people use terms that are not defined in the regulations, I get confused and cannot offer advice.

So, when someone (lending manager) says: "They are treating the prepayment penalty as an early termination fee.", I have no idea what they are really talking about and probably - neither do they.

Prepayment penalties on a HELOC present a real oxymoron. If the prepayment penalties exceed the 2 present or send the points and fees over 3% it makes the HELOC a high cost mortgage. Prepayment penalties are prohibited on a high cost mortgage.

In some cases, the only charge for terminating a HELOC plan early is the recoupment of third party fees paid by the bank. In all cases, the bank needs to review the reg and commentary very carefully and apply the rules to its specific situation.

KayBee,

So based on your comments it appears that an early termination fee cannot be charged. I agree with RLCarey and I've gone through the Reg and the commentary and did not see any reference made to the removal of an early termination fee. After reading this over and over you begin to second guess yourself, because you want to make sure you have an accurate interpretation, before providing an answer to the loan production manager. I appreciate both your guidance and professional opinions on the subject matter.

This is the only "out" (third example):


2. Examples; open-end credit. If the terms of an open-end credit agreement allow for a prepayment penalty that exceeds 2 percent of the initial credit limit for the plan, the agreement will be deemed to be a transaction with a prepayment penalty that exceeds 2 percent of the "amount prepaid" within the meaning of § 1026.32(a)(1)(iii). The following examples illustrate how to calculate whether the terms of an open-end credit agreement comply with the maximum prepayment penalty period and amounts described in § 1026.32(a)(1)(iii).

i. Assume that the terms of a home-equity line of credit with an initial credit limit of $10,000 require the consumer to pay a $500 flat fee if the consumer terminates the plan less than 36 months after account opening. The $500 fee constitutes a prepayment penalty under § 1026.32(b)(6)(ii), and the penalty is greater than 2 percent of the $10,000 initial credit limit, which is $200. Under § 1026.32(a)(1)(iii), the plan is a high-cost mortgage subject to the requirements and restrictions set forth in §§ 1026.32 and 1026.34.

ii. Assume that the terms of a home-equity line of credit with an initial credit limit of $10,000 and a ten-year term require the consumer to pay a $200 flat fee if the consumer terminates the plan prior to its normal expiration. The $200 prepayment penalty does not exceed 2 percent of the initial credit limit, but the terms of the agreement permit the creditor to charge the fee more than 36 months after account opening. Thus, under § 1026.32(a)(1)(iii), the plan is a high-cost mortgage subject to the requirements and restrictions set forth in §§ 1026.32 and 1026.34.

iii. Assume that, under the terms of a home-equity line of credit with an initial credit limit of $150,000, the creditor may charge the consumer any closing costs waived by the creditor if the consumer terminates the plan less than 36 months after account opening. Assume also that the creditor waived closing costs of $1,000. Bona fide third-party charges comprised $800 of the $1,000 in waived closing costs, and origination charges retained by the creditor or its affiliate comprised the remaining $200. Under § 1026.32(b)(6)(ii), the $800 in bona fide third-party charges is not a prepayment penalty, while the $200 for the creditor's own originations costs is a prepayment penalty. The total prepayment penalty of $200 is less than 2 percent of the initial $150,000 credit limit, and the penalty does not apply if the consumer terminates the plan more than 36 months after account opening. Thus, the plan is not a high-cost mortgage under § 1026.32(a)(1)(iii).

Okay. I received an e-mail from a former colleague concerning this subject matter and he referred me to the CFPB's web site and informed me that it speaks to the inclusion of early termination fee. I've looked into this and did not see any of the sort. This is frustrating to say the least.

To me, an early termination fee is nothing but a prepayment penalty, regardless of what you want to call it.

I would think that it would be pretty simple to determine what is was by reviewing a sample of one of the notes. If all it says is that the borrower agrees to pay X if they terminate the line sooner than x or the maturity date, then this fee is a prepayment penalty.

If the note says, that if the borrower terminates the line prior to xx, the bank is entitled to recoup fees in the amount of XX that were required to be paid by the bank to open the line, then you have a waiver situation.

The continued use of the term termination fee is not clarifying anything.

Yes, just calling something an early termination fee accomplishes nothing. You could call it a petunia but it will still be a prepayment penalty.

Finally,

I got some clarity from the lending production manager. He had indicated in their procedures that it was referred to as an Early termination fee. But in actuality it is a prepayment penalty. What they originally had in their procedures on HELOCs is a $500.00 charge for HELOCs paid off and closed within the first 36 months of origination. They ended up deleting it from the procedures which from a regulatory standpoint was the right thing to do.

One thing to understand is why banks call a prepayment penalty on a HELOC an early termination fee. It is because it can be charged if the customer notifies the bank they are ending the plan, the fee can be charged even if the balance owned is 0 and there is nothing to prepay.

I don't like that but it is quite common. You can see the difference between early termination of a HELOC plan and prepayment of a different type of loan.

Okay! Will the regulation or commentary differentiate between what the bank calls an "early termination fee" versus a "prepayment penalty" on a HELOC? I would conclude that they probably don't.

They are both prepayment penalties for regulatory purposes.