What happens when both home equity and interest rates skyrocket?
Rising interest rates are rapidly giving pause to cash out refinance activity and subsequently reigniting interest in home equity loans (HELoans) and home equity lines of credit (HELOCs). With home values
surging nearly 30 percent over the past year, homeowners are on the hunt for products that help them tap into their increasing equity. Originators looking to respond to the rising demand for home equity products, will need to pay close attention to compliance and quality control. The documentation and data requirements to secure a home equity loan or home equity line of credit are always as rigorous as requirements for a first mortgage loan. Conversely, disclosure requirements can become quite complex based on product structure.
Cash-out refinances fall & home equities rise
A recent TransUnion report indicated that cash-out refinances decreased by six percent in the last quarter of 2021, while HELOCs rose a whopping 31 percent annually. Traditional home equity loans, also referred to as second mortgages, or closed-end home equity loans, increased by 13 percent annually. This is while we all watch interest rates sore in response to the Federal Reserve Bank’s recent unprecedented hike of .75 percent, the largest increase in nearly three decades.
The lure of cash
Despite rising interest rates, inflated home prices continue to lure consumers into tapping their equity. With a home equity loan as an alternative to cash-out refinance, homeowners can maintain their low rate first mortgage and still access the mounting cash value of their home. Shorter loan terms on home equity products can also help keep rates lower. Furthermore, HELOCs offer variable payments options and repayment is typically only on the outstanding credit balance.
Home equity oversight
Dependent upon the type of originating organization, home equity loans fall under the purview of the Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), U.S. Department of Housing and Urban Development (HUD), as well as other contributing federal agencies, and state law. There is no lack of regulatory oversight and guidance, with additional rules applied under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), signed into law in 2018, as well as residual regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
The maze of disclosures – Can you keep up?
It’s important to note that although home equity volume became virtually non-existent after the Great Recession, the rules and regulations have grown in complexity. There are an abundance of regulatory and disclosure nuances associated with home equity loan products, with the vast majority falling under the mindful watch of the CFPB, here are some highlights:
The Truth-in-Lending Act (TILA/Regulation Z) is the most predominant driver of disclosures for HELOCs in particular. Reg Z comes into play repeatedly based on loan product parameters, including how the loan is transitioned for repayment, if/when the loan reverts to a closed-end loan, how the outstanding balance/available credit is handled at time of conversion, and more.
The Annual Percentage Rate (APR) disclosure falls under TILA/Reg Z and is no joke for HELOCS. The CFPB specifically says APR determination and disclosure must be clear, conspicuous, and accurate. At a minimum, APR must be disclosed for termination or acceleration of outstanding balance, renewal terms, fee rebates, substitute indexes for variable rates, balloon payments, prepayment penalties, and negative amortization.
The Real Estate Settlement Procedure Act (RESPA) is also applicable for open-end lines of credit, HELOCs, dictating how settlement costs are applicable and disclosed to consumers. This includes disclosure forms that pre-date Dodd-Frank, such as the Good Faith Estimate (GFE) and HUD-1.
The Spreader Clause, also know as a dragnet or cross-collateralization clause, can impact the rules tied to the current loan, as well as subsequent open-end credit extensions.
Periodic Statements are a requirement for home-equity plans with provisions mandated and overseen by the CFPB.
Disclosure delivery methods and timelines vary in accordance with the manner which the borrower makes application and the parameters of the loan. Additionally, originators have the option to provide a single disclosure or multiple disclosures for their home equity plans, which could add to convenience but takes away from consistency.
Is your QC plan ready for the home equity challenge?
In today’s environment, originators need to be prepared to swiftly pivot their business approach, whether in response to rising interest rates, inflation, a pandemic or otherwise. This level of rapid transitioning and responsiveness commands the attention of your key resources. QC Verify understands the importance of resource dedication to your organization’s areas of expertise. This is why we have designed our Quality Control partnership methodology to effectively pick up the pieces that often fall through the cracks when business swings in another direction or swells unexpectedly.
Our unique boutique approach to QC and audit offers modern automation with extensive industry expertise. We recognize the importance of going beyond rules, regulations, and checklists to fully support your operational processes as well as your strategic vision. Prepare for the challenges of tapping household equity with a QC partner, who through experience and innovation, instills assurance that you’re mitigating operational and fraud risk, as well as achieving the soundness of being compliant – no matter what the challenges. Visit us at www.qcverify.com to learn more about how you can outperform the competition with our breakthrough QC solutions and technology.