Answer:
Randy Carey
How often does your interest rate adjust?
(3) Determination of annual percentage rate. For purposes of paragraph (a)(1)(i) of this section, a creditor shall determine the annual percentage rate for a closed- or open-end credit transaction based on the following:
(i) For a transaction in which the annual percentage rate will not vary during the term of the loan or credit plan, the interest rate in effect as of the date the interest rate for the transaction is set;
(ii) For a transaction in which the interest rate may vary during the term of the loan or credit plan in accordance with an index, the interest rate that results from adding the maximum margin permitted at any time during the term of the loan or credit plan to the value of the index rate in effect as of the date the interest rate for the transaction is set, or the introductory interest rate, whichever is greater; and
(iii) For a transaction in which the interest rate may or will vary during the term of the loan or credit plan, other than a transaction described in paragraph (a)(3)(ii) of this section, the maximum interest rate that may be imposed during the term of the loan or credit plan.
Answer:
Jim Bedsole
I think the question may be about what comparable transaction to use to compare to the HELOC rate, not how to determine what HELOC rate to use. For that, Comment #2 to paragraph 1026.32(a)(1)(i) provides the detail and it really relates to whether there is a fixed rate period for the HELOC or not — it could be anywhere from a one-year to a 20-year. If the HELOC is a fixed rate HELOC for the entire term, you would use 20-year as that is the HELOC term to maturity. Otherwise, you'll use the term closest to any fixed rate period for the HELOC. If there is no fixed rate period for the HELOC, you will use the 1-year term to compare. Here's what that comment says:
2. Comparable transaction. Guidance for determining a comparable transaction is set forth in comments 35(a)(1)-1 and 35(a)(2)-2 and -3, which direct creditors to published tables of average prime offer rates for fixed- and variable-rate closed-end credit transactions. Creditors opening open-end credit plans must compare the annual percentage rate for the plan to the average prime offer rate for the most closely comparable closed-end transaction. To identify the most closely comparable closed-end transaction, the creditor should identify (1) whether the credit plan is fixed- or variable-rate; (2) if the plan is fixed-rate, the term of the plan to maturity; (3) if the plan is variable-rate, the duration of any initial, fixed-rate period; and (4) the date the interest rate for the plan is set. If a fixed-rate plan has no definite plan length, a creditor must use the average prime offer rate for a 30-year fixed-rate loan. If a variable-rate plan has an optional, fixed-rate feature, a creditor must use the rate table for variable-rate transactions. If a variable- rate plan has an initial, fixed-rate period that is not in whole years, a creditor must identify the most closely-comparable transaction by using the number of whole years closest to the actual fixed-rate period. For example, if a variable-rate plan has an initial fixed-rate period of 20 months, a creditor must use the average prime offer rate for a two-year adjustable-rate loan. If a variable-rate plan has no initial fixed-rate period, or if it has an initial fixed-rate period of less than one year, a creditor must use the average prime offer rate for a one-year adjustable-rate loan. Thus, for example, if the initial fixed-rate period is six months, a creditor must use the average prime offer rate for a one-year adjustable-rate loan.
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