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 Most importantly, this type of consumer credit transaction, involving a consumer's principal residence, can be rescinded (or canceled) within three business days.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 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:
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how the annual percentage rate (APR) is determined;
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for variable rate loans, what the maximum APR will be, and
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how and when the interest rate may change, and
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how and when payments may change;
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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;
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notice that a default on the loan could cause the consumer to be at risk of losing his or her dwelling;
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a list of the conditions and circumstances under which the creditor can terminate the contract or suspend future advances of credit; and
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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:
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the notice regarding the "cooling-off" period,
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the amount financed,
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the finance charge,
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the number and amount of payments under the loan,
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the due dates for payments, and/or
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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:
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immediately loses any security interest it may have in the consumer's home,
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loses any right to collect further interest or finance charges, and
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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:
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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%.
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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).
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The consumer is in default.
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The maximum APR is reached.
