Our bank allows a home equity fixed loan to be a 1st lien. Client is currently in a higher interest mortgage loan and can reduce the interest by 2+ points using the home equity fixed rate loan that offers amortization of up to 30 years. Our max LTV is 85% for the HE. Property valuation is there. Client is currently escrowing for taxes and insurance. If they refinance, i am assuming they would no longer be escrowing. They currently do not deduct for mortgage interest because the standard deduction is more of a benefit. Does anyone see a downside to refinancing this way? There are no costs for borrower if refinancing with HE vs the usual cost to refinance the traditional way.

As long as both the customer and the bank anticipates that this account is actually going to be used as a revolving line of credit, then there is nothing wrong with it. But if all the customer is going to do is get the HELOC, take one advance to pay off the first lien and not do anything else with the account, then you are both using the line as a closed end credit.

Official Interpretation

43(h) Evasion; open-end credit.

1. Subject to closed-end credit rules. Where a creditor documents a loan as open-end credit but the features and terms, or other circumstances, demonstrate that the loan does not meet the definition of open-end credit in § 1026.2(a)(20), the loan is subject to the rules for closed-end credit, including § 1026.43.

Our bank allows a home equity fixed loan to be a 1st lien.

If you are actually referring to a Home Equity Line of Credit then see Randy's post.

If you are referring to loan being processed through your closed-end home equity program then it would still be subject to all the applicable closed end disclosures.

I will add one additional comment to Randy's post. The FI is violating the regulation if they are intentionally structuring a closed-end product as an open-end product to avoid disclosure requirements.

(h) Evasion; open-end credit. In connection with credit secured by a consumer's dwelling that does not meet the definition of open-end credit in § 1026.2(a)(20), a creditor shall not structure the loan as an open-end plan to evade the requirements of this section.


Official Interpretation

43(h) Evasion; open-end credit.

1. Subject to closed-end credit rules. Where a creditor documents a loan as open-end credit but the features and terms, or other circumstances, demonstrate that the loan does not meet the definition of open-end credit in § 1026.2(a)(20), the loan is subject to the rules for closed-end credit, including § 1026.43.

Randy, didn't you read something into the question? The OP said home equity loan not LOC.

Richard - yes - apparently I did

I will blame it on the lack of coffee.

Appears all you are doing is refinancing their current loan with another lender with your bank for a lower rate. Whether your bank escrows or not [assuming not required] would be a credit decision, I would think, or customer preference.

I mistakenly read it the same way randy did. What is the difference between a "home equity fixed loan to be a 1st lien" and "the traditional way?" This just sounds like a refinance to me.

Long ago, I retrained myself to stop using the word "loan" to describe a revolving "line" of credit. At least that way I don't get myself confused.