We are thinking about changing our HELOC portfolio to interest only payments. Would we need a change in terms notice? I guess I could see this as a benefit to the customer because we are lowering their required payment amount but do we need to have anything informing the customer that they will owe the full note amount at maturity if they make the minimum payments?

I would be VERY careful making any change that is not presented to customers individually & agreed in writing. The contrarian view of this "advantage" is that the consumer's Finance Charge will go up--not a favorable change.

I haven't looked the regs up, but you will have to disclose a great deal. This does not fit the circumstance of dropping an interest rate (change favorable to a consumer). From memory, which is not my best asset:

This falls under 226.9 (I think) Subsequent disclosures, Open End credit. Under 226.9 it refers you to 226.6 (Initial disclosures), and states that a change in any terms you are required to disclose initially will require a redisclosure. I seem to remember that 226.6 will refer you back to 226.5b.

At a minimum, and I probably am missing something very important, you would have to redisclose the minimum payment calculation examples etc. I'm not sure whether you would have to do a new historical table or not. You would need to go through the regs yourself.

Now, even if under the regs you *may* (and I'm not saying you can) be able to make this change unilaterally, I totally agree with Richard. The borrower's understanding of the original transaction is related to the original disclosures and agreement. Without having the borrower sign new disclosures, you have no way to prove that the borrower understands the effect of your change. Many people don't read/understand all the stuff on their statements and notices.

Realistically, if the borrower is confronted with an unexpected balloon payment he/she/they can't make, and you have to foreclose, are you in a very good position? The borrower could argue that this change was unfair and/or misleading. It is a material change causing the Borrower to pay more interest if they make their minimum payment, as Richard notes. A reasonable consumer might well be misled.

I have no way of knowing how the regulators would view this, but I suspect they'd raise some concerns. I think they'd catch it, because they're supposed to review examples to make sure your periodic statements are correct. Certainly I would clear it with your regulators before doing this.

My first reaction was to redisclose everything, to be safe, and have the Borrower(s) sign new agreements and disclosures.

Kathy

Oh, and BTW, if you offer a new option you will still have to support the old payment option, too. You'll never get 100% of your customers to go along with ANYTHING!

One of the legal requirements for a contract to be valid is mutual assent, or a meeting of the minds. If you change this without agreement of the customer, you have a lack of mutual assent, and a judge may rule that they don't have to pay you diddly-squat. I'd run this by my attorney.

And keep in mind that the rules surrounding changes in terms to HELOCs are far more stingent than they are for any other open-end credit. I would say it's likely you could not make this change without customer consent.

Thank you all for your comments!

I don't think that a customer acknowledgement is required. Why can't a bank make a change in terms on a HELOC (to interest only) if they provide the 15-days advanced notice and the required disclosures (minimum payment, maximum payment and historical example for a variable rate product)?

OSC 5b(f)(3)(iv) 1. Beneficial changes says, "as long as existing options remain, ... a creditor may offer the consumer the option of making lower monthly payments". Therefore, a bank should be able to change its HELOC's minimum payment requirement and convert most customers over to interest only. If it provides a 15-day advanced notice (before the billing cycle in which the change takes place), complies with 226.9(c)(1)6., and offers an opt-out provision that retains the previous option, then IMO they are OK and there's no need to get any written customer authorization for such a change in terms.

Any questions, comments or clarifications are of course appreciated.

You better read all of 226.5b a little closer. You can offer the account holder a change in terms, but they must expressly agree to it in writing.

Prove that changing the payment to interest only is a beneficial change. You can't, because in the long term it will have a negative affect on the account holder.

I concur with Dan on this one. We actually tried this very argument (change to interest only) with the Federal Reserve one time and lost. It would have to be a written opt-in, rather than an opt-out.

Also, look at the commentary 226.9(c)(1)-6 which says to me that if you change the minimum payment on a heloc (with or without the consent of the consumer), you also have to give the early disclosures relating to that new minimum payment, which includes the example based on a $10,000 balance (5b(d)(5)(iii), and if a variable rate is applied 5b(d)(12)(x) and (xi) (the historical table), unless these disclosures were given earlier.

Thanks! I've got all my disclosures ready and I've re-read the Reg a few more times. Also, the last time we did this we tried the opt-in method, just to be on the safe side.

In response to Dan, the OSC's example for changes by written agreement is just the opposite of my situation. That says the customer needs to agree in writing to go from interest-only to an amortizing situation. Furthermore, it says that offering more options to consumers and lowering monthly payments are good examples of beneficial changes. A lower minimum payment offers consumers greater financial flexibility, which is an unequivocal benefit (even over the life of the plan). Think Continental Bank (i.e. liquidity).

Since 1990, has anyone tried to convert customers to interest only (without written consent) and lost with the FDIC or OCC like rlcarey did with the FRB (described above)?

You're headed down the wrong path IMO if you change the terms without written acceptance of the offer.

OSC 226.5b(2)
2. Changes to home equity plans entered into on or after November 7, 1989. Section 226.9(c) applies if, by written agreement under §226.5b(f)(3)(iii), a creditor changes the terms of a home equity plan — entered into on or after November 7, 1989 — at or before its scheduled expiration, for example, by renewing a plan on different terms. A new plan results, however, if the plan is renewed (with or without changes to the terms) after the scheduled expiration. The new plan is subject to all open-end credit rules, including §§226.5b, 226.6, and 226.15.


Paragraph 5b(f)(3)(iii)

1. Changes by written agreement. A creditor may change the terms of a plan if the consumer expressly agrees in writing to the change at the time it is made. For example, a consumer and a creditor could agree in writing to change the repayment terms from interest-only payments to payments that reduce the principal balance. The provisions of any such agreement are governed by the limitations in §226.5b(f). For example, a mutual agreement could not provide for future annual percentage rate changes based on the movement of an index controlled by the creditor or for termination and acceleration under circumstances other than those specified in the regulation. By contrast, a consumer could agree to a new credit limit for the plan, although the agreement could not permit the creditor to later change the credit limit except by a subsequent written agreement or in the circumstances described in §226.5b(f) (3)(vi).

2. Written agreement. The change must be agreed to in writing by the consumer. Creditors are not permitted to assume consent because the consumer uses an account, even if use of an account would otherwise constitute acceptance of a proposed change under state law.

Paragraph 5b(f)(3)(iv)

1. Beneficial changes. After a plan is opened, a creditor may make changes that unequivocally benefit the consumer. Under this provision, a creditor may offer (What do you do if they don't want to accept your offer?) more options to consumers, as long as existing options remain. For example, a creditor may offer the consumer the option of making lower monthly payments or could increase the credit limit. Similarly, a creditor wishing to extend the length of the plan on the same terms may do so. Creditors are permitted to temporarily reduce the rate or fees charged during the plan (though a change in terms notice may be required under §226.9(c) when the rate or fees are returned to their original level). Creditors also may offer an additional means of access to the line, even if fees are associated with using the device, provided the consumer retains the ability to use prior access devices on the original terms.

Thanks Dan. We are literally on the same page(s) now - if not figuratively. If a consumer does not accept our new option, they will need to opt-out and we will continue to honor the amortizing feature of their plan with us until it matures. After maturity, if they want to renew it with us, then it will have to be interest-only.

Quote:

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If a consumer does not accept our new option, they will need to opt-out

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I don't think that was what Dan was saying. You can't automatically change them to interest only and then require them to "opt-out" if they don't want it. It would have to be an offer and they could "opt-in".

We are contemplating a similar change, except we want to change the interest accrual method on Equity Lines and unsecured lines. The change will be to go from a monthly interest calculation to a daily interest calculation. It seems that we would need to follow a similar work process for this change since this is not in the borrowers "favor" although an analysis shows the impact is minimal for most customers.
Does anyone have an actual sample change in terms?