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professional and financial regulation
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Bureau of Financial Institutions
36 state house station (207) 624-8570 (207) 624-8590 (FAX) Lloyd P. LaFountain III Superintendent |
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Bureau of Consumer Credit Protection
35 state house station (207) 624-8527 (207) 582-7699 (FAX) William N. Lund Superintendent |
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June 17, 2008
Joint Advisory Ruling #116
Re: “Convenience”
HELOC's
Dear
You have sought guidance as to whether or not
"convenience" home equity lines of credit (HELOCs) are
"simultaneous second-lien loans" as described in the
"Interagency Guidance on Nontraditional Mortgage Product Risks"
issued September 29, 2006 (the "Interagency Guidance") and
consequently fall within the definition of "subprime mortgage loan"
in PL 2007 Chapter 273 and PL 2008 Chapter 471 ("Maine's Predatory Lending
Law").
In your request, you draw to the Bureaus’ attention to Joint
Advisory Ruling #111, in which the Bureaus considered a request for guidance
regarding the inclusion of HELOCs generally under the definition of
"subprime mortgage loan" in 9-A M.R.S.A. §8-103(1-A)(BB), which
section defines "subprime mortgage loan" as either a
"nontraditional" mortgage or a "rate spread" home loan.
Joint Advisory Ruling #111 states that HELOCs should not be
included in the definition of "subprime mortgage loan" under 9-A
M.R.S.A. § 8-103(1-A)(BB), except to the extent a HELOC is a simultaneous
second-lien loan as defined in the Interagency Guidance, or meets the criteria
of a high-rate, high-fee mortgage under §8-103(1-A)(V). Subsequent to issuance of Advisory Ruling #111, the Legislature passed “An Act
Relating to Mortgage Lending and Credit Availability.” This Act further limited the loans included
under the Interagency Guidance so that, not only do HELOCs have to be
simultaneous second-lien loans in order to be treated as nontraditional
mortgage products, they must also allow a borrower to defer repayment of
principal or interest.
In your request, you point out that "convenience" HELOCs
are not new to the market nor are they considered to be
"nontraditional" or "exotic" mortgage loans. You state that creditors typically offer
"convenience" HELOCs as part of a relationship package to their best,
or "prime," customers, i.e., those customers who qualify in
accordance with appropriate underwriting standards. You state that these HELOCs
are often approved and offered to these first mortgage loan customers
automatically, to be used at their convenience and sole discretion at some
later time but not as part of the initial purchase or refinance of a purchase
loan, nor in lieu of a higher down payment. As stated in your request, these
"convenience" HELOCs are closed on the same day as the first
mortgage, but are never tied to the first mortgage by a draw on the line for a
down
Letter to
Re: Convenience HELOCs
June 17, 2008
Page Two
payment. You have also indicated that at least some of
the "convenience" HELOCs being offered may contain a principal or
interest deferral attribute and that such a feature is common with
"convenience" HELOCs. This
type of "all-in-one" closing, you indicate, is efficient for both the
creditor and the borrower, and provides exceptional service to the creditor’s
best customers.
As part of your request, you have provided the Bureaus with
information from the Federal Reserve Bank of Boston’s website, and testimony
from Deputy Comptroller Kathyrn Dick dated September 20, 2006, which you state
support your assertion that the Federal agencies, when commenting upon
simultaneous second-lien loans, mean only those loans that are tied to the
first mortgage by a draw on the line for a down payment, or used as an
alternative to paying private mortgage insurance.
In light of this information, you assert that the type of
simultaneous second-lien loans that were intended to be covered by the
Interagency Guidance are those that were closed at the same time as the first
mortgage and used toward the down payment on the first mortgage or used to
avoid private mortgage insurance. Such a
conclusion, you state, comports with the basis for which the Federal agencies
issued the Interagency Guidance, and is consistent with public policy and the
purpose of
Bureaus’ Response
With respect to the treatment of
simultaneous second-lien loans, it is the Bureaus’ view that the Interagency
Guidance is primarily concerned with those simultaneous second-lien loans that
significantly reduce owner equity and increase credit risk. When disbursement is made simultaneously with
a first lien loan there is a greater likelihood of causing immediate hardship
to the borrower. Loans that have this
effect are often, though not exclusively, tied to the first-lien loan by a draw
at closing, and used for a down payment or to avoid payment of private mortgage
insurance. The Appendix to the
Interagency Guidance supports this view wherein it defines simultaneous
second-lien loans as “[a] lending arrangement where either a closed-end
second-lien or home equity line of credit (HELOC) is originated simultaneously
with the first lien mortgage loan, typically in lieu of a higher down payment.”
(Underline added.) The Interagency
Guidance indicates that simultaneous-second lien HELOCs typically increase a
borrower’s exposure to higher interest rates and payment burdens.
The Bureaus recognize that, if reasonable equity levels exist and
the “convenience” HELOC is not used toward the down payment or to avoid payment
of private mortgage insurance, then these types of loans lack the negative
qualities that the Interagency Guidance seeks to address. Demonstration that (a) the borrower has a
reasonable equity level in the subject property, and (b) the purpose of the
loan is not for a down payment on a first mortgage or to avoid payment of
private mortgage insurance, sufficiently indicates that a loan is a prime
mortgage loan and not a subprime mortgage loan. Equity is related to credit risk, as is the
ability to finance or refinance property without a second loan. The Bureaus believe that a reasonable equity
level exists with respect to a transaction involving a “convenience” HELOC when the combined
loan-to-value ratio of both the first loan and the HELOC is 90% or less.
Letter to
Re: Convenience HELOCs
June 17, 2008
Page Three
Given the diminished risk associated with “convenience” HELOCs,
they should not be labeled as subprime mortgage loans. This view is consistent with policy
objectives of
Conclusion
As indicated in previous advisory rulings, HELOCs are not
considered nontraditional mortgages under the Interagency Guidance unless they
are simultaneous second lien loans and also defer payment of principal or
interest. “Convenience” HELOCs are
those HELOCs that are closed simultaneously with a first mortgage but are not
used toward the down payment on the first mortgage or to avoid payment of
private mortgage insurance. Because
“convenience” HELOCs do not present the same opportunities for abuse as other
“simultaneous second-lien loans,” the Bureaus agree that even those
“convenience” HELOCs that permit deferral of payment of principal or interest
should not be treated as “simultaneous second-lien loans” under the Interagency
Guidance and, therefore, will not be considered “subprime mortgage loans” under
Maine’s Predatory Lending Law.
A simultaneous second-lien HELOC shall be regarded as a
"convenience" HELOC under the Interagency Guidance, if (1) the
convenience HELOC is not drawn at closing (or at the end of any applicable
rescission period) to satisfy the first mortgage lender's equity requirements
for granting the first mortgage loan, or to avoid payment of private mortgage
insurance; and (2) the combined loan to value ratio of the first residential
mortgage loan and the line amount of the second lien “convenience” HELOC is 90%
or less.
Finally, the Bureaus wish to point
out that even if a “convenience” HELOC does not fall under the Interagency
Guidance, it may still fall within the definition of “subprime mortgage loan”
if the loan terms meet the threshold for high rate, high fee mortgages.
We hope this guidance is responsive to your request for our
opinion on this matter.
/s/Lloyd P. LaFountain, III_______________ /s/William N. Lund________________________
Lloyd
P. LaFountain III, Superintendent William
N. Lund, Superintendent
Bureau of Financial Institutions Bureau of Consumer Credit Protection
