ABA Regulatory Compliance Inbox: If my bank reduces the amount of a customer’s HELOC, are we required to provide an adverse action notice?

And: Must banks include a printed version of their “HMDA Disclosure Statement” in their CRA public file?

By Leslie Callaway, CRCM, CAFP and Rhonda Castaneda, CRCM

My bank would like to reduce the amount of a customer’s home equity line of credit, even though the line does not mature for several years. Would the bank be required to give the customer an adverse action notice under Regulation B (Equal Credit Opportunity Act)?

It depends on why the bank is considering the reduction.

If it is because the consumer is currently delinquent, no adverse action notice is required. (See §1002.2(c)(2) which excludes from the definition of adverse action “any action or forbearance relating to an account taken in connection with … delinquency as to that account.”) However, if the bank is reducing the line for other reasons (for example, past delinquency, property value decline, non-use), then the bank must provide an adverse action letter. (See Regulation B §1002.2(c)(1)(iii) which includes in the definition of adverse action “a termination of an account or an unfavorable change in the terms of the account that does not affect all or substantially all of a class of the creditor’s accounts.”) (Answer provided February 2023.)

Some mortgage applicants indicate at the time the bank provides an application that they are interested in an adjustable-rate mortgage but have yet not identified a property that will secure the loan. May the bank wait until the customer identifies a property address before providing the booklet and other early variable-rate disclosures?

No. Section 1026.19(b) of Regulation Z (Truth in Lending Act) states that “if the annual percentage rate may increase after consummation in a transaction secured by the consumer’s principal dwelling with a term greater than one year” the variable rate disclosures generally must be provided “at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier.” (Answer provided February 2023.)

My bank is making a loan secured by a building located in a special flood hazard area and thus must have evidence of flood insurance to comply with flood regulations (12 CFR §§ 25, 208.25, and 339). The borrower is a company (Company A) while the owner of the building is a closely held operating company (Company B). The borrower provided a flood insurance policy issued under the National Flood Insurance Program, but it names Company B as the insured. To comply with the regulations, should not the flood insurance policy list Company A as the insured given it is the borrower?

No. The regulations simply require that there be adequate flood insurance coverage and does not specify in whose name the policy must be issued. Our understanding is that a NFIP policy may only be issued in the name of the owner of the building. As such, a policy listing Company B in this example would be deemed compliant, presuming it otherwise met the regulatory requirements (such as in a proper amount). (Answer provided March 2023.)

Directors of my bank are in the process of reporting to the bank companies in which they have at least a 10 percent ownership interest. The purpose is to determine whether any director has “control” of the company, thereby making the company a “related interest” as defined in Regulation O and subject to its requirements. One director no longer has that level of ownership in a company previously reported. Would loans to a company previously considered a related interest still be subject to the requirements of Regulation O?

No. However, it may be prudent to continue to document the fact that the loans were subject to the requirements during the applicable period. (Answer provided March 2023.)

Community Reinvestment Act (CRA) regulations (12 CFR §§ 25, 228, and 345) require banks to maintain a public file containing certain information. There is disagreement at the bank as to whether this includes home mortgage loan data pursuant to Home Mortgage Disclosure Act, specifically a “HMDA Disclosure Statement” provided by the regulators. Must banks include a printed version of their “HMDA Disclosure Statement” in their CRA public file?

No. CRA regulations state that banks required to report HMDA data must simply include in their public file a written notice that their HMDA Disclosure Statement may be obtained on the Consumer Financial Protection Bureau’s website (see §§25.43(b), 228.43(b)(2) and 345.43(b)(2)). There is no requirement to provide a printed version of the document in the CRA public file, though nothing prevents it. (Answer provided March 2023.)

My bank offers a checking account that entitles holders of the account who open a new home equity line of credit to have the annual fee on the HELOC waived. Because the fee waiver is a key feature of the account, it is clearly noted in the advertisement. Because this is an advertisement for a checking account—not an advertisement for the HELOC—does the advertisement need to include Regulation Z-triggered disclosures?

Probably. Even though the advertisement is primarily for a checking account, it also appears to be advertising the HELOC, and under §1026.16(b)(1) of Regulation Z (Truth in Lending Act), including an HELOC annual fee (“set forth affirmatively or negatively”) in an advertisement for a HELOC triggers disclosure of additional terms. In addition, as explained in Comment 1 to §1026.16 (b)(1), “Negative as well as affirmative references trigger the requirement for additional information. For example, if a creditor states no interest or no annual membership fee in an advertisement, additional information must be provided.” (Emphasis added.) (Answer provided March 2023.)

For the Homeownership Counseling list required under §1024.20(a) of Regulation X (Real Estate Settlement Procedures Act), may the bank provide consumers the web link for them to retrieve the list from the Consumer Financial Protection Bureau’s or the U.S. Department of Housing and Urban Development’s website, or must it actually give them a list?

The bank must provide a list. Section 1024.20(a) states, in part: “The lender must provide the loan applicant with a clear and conspicuous written list of homeownership counseling organizations that provide relevant counseling services in the loan applicant’s location.” (Answer provided March 2023.)

May a customer getting a loan that is required to have flood insurance pay a full year’s premium upfront and then begin escrowing flood insurance premiums in year two?

No, according to federal flood insurance rules. The prudential regulators regulations state that the bank:

[S]hall require the escrow of all premiums and fees for any flood insurance required … for any designated loan secured by residential improved real estate or a mobile home … payable with the same frequency as payments on the designated loan are required to be made for the duration of the loan. (Emphasis added.) (§339.5(a)(1), Federal Deposit of Insurance Corporation, §208.25(e)(1)(i), Federal Reserve Board, and §22.5(a)(1), Office of the Comptroller of the Currency.)

(Answer provided February 2023.)

Answers are provided by ABA Regulatory Policy and Compliance team members Leslie T. Callaway, CRCM, CAFP, senior director, compliance outreach and development; and Rhonda Castaneda, CRCM, senior compliance analyst. Answers do not provide, nor are they substitutes for, professional legal advice.