Home Equity Loan ImprovementsWritten by Marc Sylvester
It's time for home equity loan improvements There's more Regulation Z compliance on way, courtesy of Home Equity Loan Consumer Protection Act. This fall banks will have to implement new home equity loan disclosure rules Federal Reserve Board was required to issue under act. The Federal Reserve released final version of home equity regulation on June 5. The rules were made effective June 7. However, compliance is optional until Nov. 7 because Congress gave institutions five months after finalization to start. However, there's no time like present. This column is devoted to bankers' most common questions about demands of this complicated rule. You should, of course, check regulation and consult legal counsel before acting on these suggestions. Product Design Q. This is a disclosure regulation. Does that mean that, while we must provide customers lots of information about home equity products, we are free to design them as we see fit? A. No. The regulation leaves many design matters to lenders and provides options in a number of other areas. At same time, however, it creates three absolute restrictions on design: (1) If you offer a variable-rate program, you must use a base rate beyond your control. Information on that rate must be generally available to public. Examples include prime rate as published in The Wall Street Journal or rates on U.S. government securities. (2) Lenders generally may not terminate plan and accelerate balance before loan's scheduled expiration. There are three exceptions: customer fraud or misrepresentation; failure to meet repayment terms; or action or inaction adversely affecting collateral. (3) Lenders may not unilaterally change any but insignificant terms of a home equity plan, with following exceptions: * You may make changes provided for in contract, as long as both triggering event and resulting changes are stated specifically in contract. * You may substitute a new index if original index becomes unavailable. This is subject to two conditions: new one's historical fluctuations must be substantially similar to old one and it must produce a rate similar to that in effect when old index became unavailable. * You may prohibit further advances or reduce credit limit in four circumstances: if value of dwelling falls significantly below original appraised value; if you have a reasonable belief, based on evidence, that there has been a material adverse change in customer's ability to repay; if customer defaults on any material obligation he's agreed to under plan; or if government action--such as a reduced usury ceiling--either precludes imposition of agreed upon annual percentage rate (APR) or adversely affects priority of your bank's security interest. If you impose restrictions based on these four situations, you must reverse your action if and when problem is eliminated. Preparing Early Disclosures Q. What are basic early disclosure requirements? A. The heart of this regulation is a new requirement that customers be given detailed disclosures and a general brochure about home equity plans when provided with an application form. The only exceptions are for applications contained in magazines or taken by telephone or through third parties. In these cases, lender can mail or deliver disclosures and brochure to customer within three business days after receiving application. Q. Do these disclosures have to be in a form customer can keep? A. Not when they are provided with application. This means that you have option to simply print disclosures on application form. If you do so, however, you must include a statement suggesting that customer make a copy. Q. Must early disclosures be presented in any particular format? A. Yes. You must be sure that certain required terms are grouped together and are segregated from other information. These terms include following (assuming they are applicable); first four must precede all others: * The customer should keep a copy of disclosure. * Any time limit within which customer must apply to receive terms described. Alternatively, include a statement that terms may change. In addition, lender must state that customer has right to a refund of any fees if any terms change and if, as a result, customer decides not to enter into plan. * A warning that lender is acquiring a security interest in customer's dwelling and that customer could lose his home if he defaults. * An advisory that, under certain circumstances, lender may terminate plan and accelerate any outstanding balance; prohibit further advances; reduce credit limit; or otherwise change plan, as provided in loan agreement. * A discussion of plan's payment terms. This should include: length of draw period and any repayment period; an explanation of how minimum payment is determined, timing of payments, and whether making only minimum payments would not repay any or all of principal balance; and fact that plan permits conversion of balance to a fixed-term loan. You must also include an example, based on a $10,000 outstanding balance and a recent APR, showing minimum periodic payment, balloon payment, and time needed to repay $10,000 loan making only minimum and balloon payments, with no additional advances. * For fixed-rate loans, APR must be one that was in effect within previous 12 months. For variable-rate plans, historical table satisfies this requirement.
| | Bridge Loans: Everything You Wanted To KnowWritten by Marc Sylvester
As name implies, bridge loans fulfill a vital need for active developers by giving life to a new project in months before lenders feel confident enough to make available a construction loan, or a repositioning loan in case of an existing project. But real estate bridge loans have other uses, both tactical and strategic, that make them indispensable in today's New York marketplace.For new development projects, bridge loans provide financing for property assemblages, site acquisition, and development expenses. Not only do such loans provide developer with funds to acquire a site, they also supply breathing room that developer needs to create architectural designs and analyses for new construction projects. Just as important, bridge loans offer an opportunity to refine developer's property repositioning or acquisition plan in case of an existing project. During development--or repositioning--planning stage, developer's financial advisor has time to arrange senior construction and mezzanine loan financing. For example, in recent months our firm has arranged highly competitive financing for projects under 80/20 Bond Financing Program, and other projects under recent Liberty Bond Program for downtown Manhattan. Still others have been condominium or office projects in which fiercely competitive New York marketplace requires developers to move extremely rapidly to acquire control of desirable locations. Bridge loans have other strategic uses for developers. By enabling construction to commence before a formal construction loan is in place, a developer may time construction to avoid a heavy winter schedule with attendant extra costs, or plan completion of construction to coincide with primary rental and sales months beginning in spring and continuing into summer season.
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