The Law

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:

• How the annual percentage rate (APR) is determined
• For variable rate loans, what the maximum APR will be, including:
  • How and when the interest rate may change
  • How and when payments may change
• Notice of the consumer's right to a refund of fees if terms change during the application process, causing the consumer not to enter into the contract
• Notice that a default on the loan could cause the consumer to be at risk of losing his or her dwelling
• A list of the conditions and circumstances under which the creditor can terminate the contract or suspend future advances of credit
• An example of a payment plan with minimum monthly charges (if the creditor offers more than one payment option, all must be outlined)

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 notice regarding the "cooling-off" period
• The amount financed
• The finance charge
• The number and amount of payments under the loan
• The due dates for payments
• The APR

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:

• Immediately loses any security interest it may have in the consumer's home
• Loses any right to collect further interest or finance charges
• Becomes liable to the consumer for the total of all interest payments and other charges already paid to the creditor or any assignee

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:

• The value of the dwelling declines significantly below the property's appraised value used as basis for the line of credit. Federal Reserve Board rules define a "significant decline" as a decrease in the value of the dwelling such that the initial difference between the credit limit and the available equity is reduced by 50%.
• The creditor reasonably believes the consumer will be unable to fulfill the repayment obligation due to material changes in the consumer's circumstances (for example, a significant decrease in the consumer's income due to a layoff).
• The consumer is in default.
• The maximum APR is reached

  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

• Any home equity loan, second mortgage or home improvement loan in which the lender gains a security interest in your home must include a conspicuous declaration of your three-day right to cancel the contract.
• Home improvement loans arranged through contractors are also subject to TILA's three-day right to cancel if a creditor is given a security interest in your home.
• If you are contemplating a home equity loan, here are some questions to ask when comparing offers:
• How large a credit line will the lender extend to me?
• How long is the term of the loan?
• What is the minimum monthly payment? Is there a maximum?
• What is the annual percentage rate (APR)?
• If the interest rate is adjustable, how much can it increase at any one time? Is there a maximum rate? A minimum rate?
• Are there any annual or transaction fees?
• Remember, you are giving a security interest in your home to the lender, and, if you default, you could lose your home. Use the three-day cooling off period to carefully review the contract and your ability to repay. Make sure that you can afford the payments before you risk your house.

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:

FDIC, Division of Compliance and Consumer Affairs
550 17th St., NW
Washington, DC 20429-9990
202-736-0000
E-mail: consumer@fdic.gov

FDIC- Boston
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)
Fax: 1-713-336-4301
E-mail: customer.assistance@occ.treas.gov

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
202-452-3693

Contact the NH Bank Commissioner if the problem is with a New Hampshire bank:

NH Bank Commissioner
53 Regional Drive, Suite 200
Concord, NH 03301
603-271-3561

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)
TDD: 1-202-326-2502

Contact the Consumer Protection & Antitrust Bureau:

Consumer Protection & Antitrust Bureau
NH Department of Justice
33 Capitol Street
Concord, NH 03301-6397
603-271-3641