If your credit union is like most credit unions, it makes loans. Often something changes after the loan is made and the credit union would like to change certain terms. The question is, can they? Well for most open-end loans, contract permitting, you can flip open the Code of Federal Regulations to 12 CFR 1026.9 and provide a change in terms notice. But it’s not so easy for every loan. Unlike other open-end credit, Home Equity Lines of Credit (HELOCs) governed under Regulation Z, section 1026.40 are subject to certain limitations. One such limitation is a creditor’s inability to make changes that would otherwise be permitted for another type of open-end credit. Specifically, section 1026.40(f) prohibits the following:
- Changing the annual percentage rate (However, changes based on a publicly available index, not under the credit union’s control, may be made); and
- Terminating a plan and demanding repayment in advance of the original term, except when;
- The consumer has made a material misrepresentation or committed fraud;
- The consumer does not meet the repayment terms;
- Action or inaction by the consumer that affects the credit union’s security interest; and
- Federal law requires that credit shall become due and payable on demand and the credit union includes this provision in the initial agreement.
Credit unions may also want to note that they are generally prohibited from changing any term of the plan. However, section 1026.40(f)(3) provides certain exceptions and states that a credit union may:
- Prohibit additional extensions of credit or reduce the credit limit, as long as the initial agreement provides for such a change;
- Change the index or margin used if the original index is no longer available;
- Make a change that the consumer agrees to in writing;
- Under the commentary, such a change cannot conflict with any other provision under section 1026.40(f);
- For example, a consumer cannot agree to change the annual percentage rate based on an index controlled by the credit union.
- Make a change that benefits the consumer;
- Make an insignificant change;
- These changes are generally used to “accommodate operation and similar problems.” and
- Temporarily prohibit additional extension of credit when:
- The value of the security declines significantly below its appraised value for purposes of the plan;
- The credit union believes the consumer will not be able to repay the obligation due to a material change in the consumer’s financial circumstances;
- The consumer is in default of a material obligation;
- The credit union cannot impose the APR provided for in the agreement because of government action;
- The priority of the credit union’s security is adversely affected by government action and the value of the security is less than 120% of the credit line; or
- A regulatory agency notifies the credit union that continued advances constitutes an unsafe and unsound practice.
If the credit union’s HELOC is also considered a reverse mortgage governed under section 1026.33, section 1026.40(f)(4) permits a credit union to terminate a plan in advance of the original term under the following circumstances:
- The consumer has defaulted;
- The consumer transfers title to the property securing the plan;
- The consumer ceases to use the property securing the plan; or
- The consumer dies.
Credit unions may want to note that the above constitutes an overview of the prohibitions and exceptions under section 1026.40(f) and more information can be found in the section itself or its commentary.