Home equity loans have become a popular way for homeowners to access the equity in their principal dwellings. A federal law now gives consumers more information, and more protection, when they enter a home equity line of credit transaction. Creditors must give certain information to you during the application process. The law also limits the creditor's ability to change the conditions of the loan. Most importantly, this type of consumer credit transaction, involving a consumer's principal residence, can be rescinded (or canceled) within three business days. This protection does NOT apply to first mortgages in which the credit is used to buy the residence (or any extension or renegotiation of the mortgage). The rescission remedy only applies to second mortgages, home improvement loans, and home equity loans or lines of credit.
The federal Truth-in-Lending Act (TILA) requires that the creditor give the consumer specific information during the application process for a home equity loan, second mortgage or home improvement loan where the creditor takes a security interest in the consumer's home:
If the consumer applies for credit through the mail or over the telephone, the disclosures must be mailed to the consumer within three business days.
TILA also provides an absolute right to rescind credit transactions involving a security interest on your home, such as a second mortgage, home equity line of credit or home improvement mortgage. The right to rescind means that the consumer could cancel the contract within three days of signing this type of credit contract. The three-day right to rescind must be disclosed in the application documents. The right to rescind extends, or continues, if the creditor violates TILA by failing to make the required disclosures at the time of the loan.
The rescission disclosure information must include a clear and conspicuous notice to the consumer, stating that the consumer has three full business days to cancel the transaction, no questions asked. The consumer has until midnight of the third day after receiving the notice or signing the documents (whichever is later) to simply cancel the transaction without incurring any liability. During this "cooling-off" period, the creditor may not provide the consumer with any money, credit or anything of value. The right may only be waived by the consumer in writing and in the case of a genuine personal emergency.
In addition, the consumer may rescind the entire loan or credit transaction for up to three years after entering it if the creditor fails to correctly provide any of the following "material" information in the disclosure notice:
The consumer may rescind the credit contract by writing the creditor stating an intention to rescind the contract and the grounds for rescission. The consumer must give back any monies received from the lender. If good grounds to rescind are found later due to a violation, the creditor:
Within 20 days of receiving a valid notice of rescission, the creditor must pay all that is owed to the consumer. Failure to do so could make a lender liable for interest on this amount. Typically, creditors pay the amount owed by permitting consumers to reduce or "offset" the amount of the loan principal which a consumer may be required to repay to the creditor. In addition, the creditor must also take steps to eliminate any record of a security interest in the home within the 20-day period.
A creditor may not change the terms of the contract once the account is open, unless the changes unequivocally benefit the consumer, such as more payment options, lower monthly payments, extending the length of the plan, etc.
Finally, the law requires that the creditor outline the conditions under which credit can be suspended or the credit limits reduced, which are as follows:
Example: Edna Greenhouse's home is appraised at $100,000 with a first mortgage of $60,000. The credit limit of her home equity line of credit is $24,000 (60% of the $40,000 worth of equity in her house). The difference between the credit limit and the available equity is $16,000 ($40,000 equity minus $24,000 credit limit). If the appraised value of Edna's home were to fall below $92,000, the creditor could prohibit further advances of credit as the difference between the credit limit and the available equity would fall to $8,000 which is a 50% reduction in the available credit.
Points To Remember
Where To Go If You Have A Problem
Attempt to resolve any problem with the creditor first.
If you need further assistance, contact the creditor's primary regulator.
Contact the Federal Deposit Insurance Corporation (FDIC) if the problem is with a FDIC-insured bank:
15 Braintree Hill Office Park
Braintree, MA 02184-8701
1-866-728-9953 (toll free)
Contact the Comptroller of the Currency if the problem is with a federally chartered bank (one that has "national" in its name):
Comptroller of the Currency, US Department of the Treasury
Consumer Assistance Group
1301 McKinney Street, Suite 3450
Houston, TX 77010
1-800-613-6743 (toll free)
E-mail: [email protected]
Contact the Federal Reserve if the problem is with a state-chartered bank that is a member of the Federal Reserve System:
Federal Reserve, Division of Consumer and Community Affairs
20th & C Streets, NW, Stop 801
Washington, DC 20551
Contact the NH Bank Commissioner if the problem is with a New Hampshire bank:
NH Bank Commissioner
64B Old Suncook Road
Concord, NH 03301
Contact the Federal Trade Commission if the problem is with a loan company or a retailer:
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580
1-877-FTC-HELP or 1-877-382-4357 (toll-free)
Contact the NH Consumer Protection and Antitrust Bureau:
NH Consumer Protection and Antitrust Bureau
33 Capitol Street
Concord, NH 03301-6397
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New Hampshire Department of Justice | 33 Capitol Street | Concord, NH | 03301