USER GUIDE FOR HOME EQUITY LENDING

Transcription

1 USER GUIDE FOR HOME EQUITY LENDING EML487

2 USER GUIDE FOR HOME EQUITY LENDING COPYRIGHT CUNA MUTUAL INSURANCE SOCIETY, 1989, 1992, 98, 2003, 04, 06, 07, ALL RIGHTS RESERVED. REPRODUCTION WITHOUT WRITTEN PERMISSION OF CUNA MUTUAL INSURANCE SOCIETY IS FORBIDDEN BY LAW.

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4 LOANLINER HOME EQUITY SYSTEM INTRODUCTION This LOANLINER User Guide for Home Equity Lending is designed to help you completely understand the purpose, design and use of the LOANLINER Home Equity System. It provides extensive information explaining the use LOANLINER documents for home equity loans. To help you use this Guide and efficiently find the information you need, we ve divided it into the following sections: Section A. User Guide for the LOANLINER Home Equity System Open-end Lending Documents Contains detailed descriptions and examples of the LOANLINER documents you will use to establish an open-end line of credit home equity account. Includes when and how to use specific documents. A tab for supplemental Texas open-end lending information is included in this section. Section B. User Guide for the LOANLINER Home Equity System Closed-end Lending Documents Contains detailed descriptions and examples of the LOANLINER documents you will use to make closed-end home equity loans. Includes when and how to use specific documents. A tab for supplemental Texas closed-end lending information is included in this section. Section C. User Guide for the LOANLINER Home Equity System Miscellaneous Documents Contains detailed descriptions and examples of miscellaneous Home Equity documents that are used with the LOANLINER Home Equity System. Includes when and how to use each document. A tab for supplemental Texas miscellaneous information is included in this section. Section D. User Guide for the LOANLINER Home Equity System MEMBER S CHOICE TM Payment Protection Contains an overview of the benefits and enrollment procedures applicable to Home Equity loans insured with CUNA Mutual s MEMBER S CHOICE TM Payment Protection. Includes instructions for both open-end and closed-end Home Equity loans.

5 LOANLINER HOME EQUITY SYSTEM Section E. Glossary of Terms Contains an alphabetical listing of definitions for terms used in this manual and those commonly used with Home Equity lending. Service and Support One of the key features of any product you use is the service and support that goes with it. You can rely on the CUNA Mutual Group to provide you with excellent support and service for the LOANLINER lending system. You can receive LOANLINER assistance by: Calling your CUNA Mutual Account Relationship Manager at: Contacting the LOANLINER Systems Department at: Phone: Fax: Mail: LOANLINER Systems Department CUNA Mutual Group PO Box 2991 Madison, WI If you wish to order any of the documents described in this manual, please use any of the methods described above to place your order. Copyright Substantial time, effort and money has been spent to develop the LOANLINER Home Equity System. The system and the User Guide have been copyrighted. The documents and explanatory materials may not be reproduced, either in whole or in part, without written permission from CUNA Mutual.

6 USER GUIDE FOR THE LOANLINER HOME EQUITY SYSTEM OPEN-END LENDING DOCUMENTS Copyright 1989, 1998, 2003, 04, 06, 07, CUNA Mutual Group, Madison, Wisconsin. ALL RIGHTS RESERVED.

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8 LOANLINER HOME EQUITY SYSTEM OPEN-END LENDING Contents General Information Introduction Definition Open-End Regulation Z Open-End Real Estate Terms Used in Open-End Home Equity Lending Document Descriptions and Instructions Open-End Loan Officer Checklist Document Description Completion Instructions Brochure Open-End Document Description Early Disclosure Document Description Document Explanation - Variable Rate Document Explanation - Fixed Rate Credit Agreement Document Description Completion Instructions Addendum Document Description Document Explanation Completion Instructions Security Instrument (Mortgage, Deed of Trust or Security Deed) Document Description Completion Instructions Notice of Right to Cancel Document Description Document Explanation Completion Instructions Advance Voucher Document Description Completion Instructions

9 Open-End Sample Transactions Introduction Example 1 - Variable Rate Early Disclosure Brochure - Open-End Credit Agreement Addendum Notice of Right to Cancel Security Instrument Voucher for Initial Advance Voucher for APR Increase and Payment Change Voucher for Subsequent Advance Example 2 - Discounted Variable Rate Early Disclosure Brochure Credit Agreement Addendum Notice of Right to Cancel Security Instrument Voucher Description for Initial Advance Voucher for APR Change and Payment Change Due to the End of the Discount Interest Rate Period Voucher for Subsequent Advance Example 3 - Fixed Rate Early Disclosure Brochure Credit Agreement Addendum Notice of Right to Cancel Security Instrument Voucher for Initial Advance Voucher for Subsequent Advance Frequently Asked Questions About Open-End Home Equity Lending Fees Index Draw Period Change in Terms - Suspension - Termination Acceleration Real Estate Settlement Procedures Act (RESPA) Rescission General

10 General Information General Information Introduction This guide is designed to help you completely understand how to use the open-end LOANLINER Home Equity documents you ve ordered. Remember that the documents you are using have been prepared especially for your credit union s home equity plan(s). The documents and samples in this guide are only samples. Your documents may look different but the usage of the documents will be the same. Document Descriptions and Instructions Each open-end LOANLINER Home Equity document below is described in detail in this Guide. Instructions for completing each document are included. Open-End Loan Officer Checklist Home Equity Brochure Early Disclosure Credit Agreement Addendum Security Instrument Notice of Right to Cancel Additional information particular to Texas open-end lending has been added to the guide. Additional documents may be used in connection with open-end home equity loans. See the LOANLINER Home Equity Miscellaneous section for more information. Open-End Sample Transactions To show you how the forms can be used to document open-end home equity accounts, three examples of account transactions are provided. Commonly Asked Questions Answers to commonly asked questions about open-end home equity lending are provided. Open-End Lending 1

11 General Information Definition Open-End Home Equity Loans Regulation Z defines open-end credit as consumer credit extended by a creditor under a plan which meets all three of the following criteria: 1) the creditor reasonably contemplates repeated transactions, 2) the creditor may impose a finance charge from time to time on an outstanding unpaid balance, and 3) the amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid. Open-end home equity loans are open-end credit plans secured by the consumer s dwelling. In this guide we refer to them as open-end home equity lines of credit or open-end home equity plans. Regulation Z Open-End The federal Truth in Lending Act governs all consumer credit transactions. Home equity line of credit plans are covered by the Act. The regulation issued by the Federal Reserve Board to implement the Act is Regulation Z. Open-End Home Equity Plan Restrictions The Truth in Lending Act and Regulation Z place certain restrictions on openend home equity plans, which include: 1. The creditor cannot use an internal index (i.e. cost of funds) for a variable interest rate. The index must be out of the control of the creditor. (Regulation Z Section 226.5b(f)(1)) 2. The creditor can only terminate the plan and accelerate the balance under three circumstances (Regulation Z Section 226.5b(f)(2)): a. the borrower commits fraud or makes a material misrepresentation in connection with the plan; b. the borrower does not meet the repayment terms of the plan; or c. the borrower s action or inaction adversely affects the collateral or the lender s rights in the collateral. 3. The creditor can temporarily suspend advances or reduce the credit limit only for certain reasons as outlined in Regulation Z Section 226.5b(f)(3)(vi). Otherwise, the creditor is obligated to continue making advances at the borrower s request during the draw period which is the period of time during which the borrower can take advances. 4. The creditor cannot change the terms of the plan once it s opened, except for very specific circumstances. Please refer to Regulation Z Section 226.5b(f)(3) for details. 2 LOANLINER Home Equity System

12 General Information Disclosure Requirements Regulation Z requires certain disclosures for open-end home equity plans secured by a dwelling. Each of the following documents must be given to the consumer for an open-end home equity plan. These documents are: 1. Early Disclosure 2. Brochure 3. Initial Disclosure (referred to as Credit Agreement and Addendum) 4. Right of Rescission 5. Periodic Statement A creditor must give an Early Disclosure along with a brochure, What You Should Know About Home Equity Lines of Credit, at the time an application for an open-end home equity plan is provided to the member. The Early Disclosure provides information on the terms and cost of the open-end home equity plan(s) offered by the creditor. If a creditor has more than one plan, information about each plan must be disclosed. The LOANLINER Open-End Home Equity Plan includes the disclosures required by Regulation Z. The Early Disclosure includes, among other things, the length of the draw and repayment periods, an explanation of how the minimum payment will be determined, the fees that the consumer will have to pay to open, use and maintain the plan and a minimum payment example showing the payment and time it would take to repay a $10,000 balance at a recent Annual Percentage Rate. If a variable rate is used with the plan, disclosures about how and when the interest rate will change, as well as limitations on the change, will be disclosed. Additionally, the Early Disclosure includes a maximum rate and payment example which discloses the maximum payment required for a $10,000 balance at the maximum Annual Percentage Rate of the plan, as well as a statement of the earliest date that maximum rate could be imposed on the plan. All variable rate plans also contain a historical table illustrating how the Annual Percentage Rate and payments would have been affected by index value changes for the specific terms of your plan in the last 15 years. As part of our ongoing support, CUNA Mutual will update the LOANLINER Early Disclosure annually to provide the most recent 15-year index history. You must order new Early Disclosures each year to take advantage of this service. Prior to the first transaction under the plan, Regulation Z Section requires the creditor to give certain initial disclosures for the plan. The initial disclosures are given in the Credit Agreement and Addendum to the Credit Agreement. They include information about the circumstances under which a finance charge will be imposed, an explanation of how it will be determined, any other charges that may be imposed, and the fact that the creditor will take a security interest in the dwelling. A billing rights notice is also included along with Open-End Lending 3

13 General Information several other disclosures, such as reasons for terminating the plan, tax implications, etc. The Credit Agreement and Addendum provide all documentation necessary to meet Regulation Z requirements. Right to Rescind Regulation Z Section requires that each consumer giving a security interest in his or her principal dwelling must have a right to rescind the plan. The Right of Rescission is the consumer s right to cancel a transaction without penalty. The Right of Rescission period is for three days. Each person who gives a principal dwelling as security for the Plan must receive two copies of the Notice of Right to Cancel. Security Instruments The legal document used to obtain a security interest in real estate is called a Mortgage, Deed of Trust, or Security Deed. The basic differences between the various documents concern the way title is held and how foreclosure takes place. The security instrument is different for every state. The LOANLINER Home Equity System provides a security instrument which can be used for open-end home equity loans. It is available for all states. Periodic Statement Regulation Z Section requires that certain disclosures be made on the periodic statement and it is very important that your data processor meet these requirements. On all open-end home equity credit plans, the credit union must mail or deliver a periodic statement at least quarterly. Real Estate Terms Used in Open-End Home Equity Lending This section gives a nontechnical introduction to terms used in home equity lending. The terms are underscored where they first occur. The credit agreement is the legal document which includes the promise to pay and all other agreements between the credit union and the borrower. The Addendum is part of the Credit Agreement. It also gives the Truth in Lending Disclosures. The borrower promises to repay the debt by signing the Credit Agreement. The security instrument (Mortgage, Deed of Trust or Security Deed) gives your credit union a security interest in the borrower s property. The borrower promises to protect your credit union s rights in the home by signing the security instrument. In a Mortgage, the borrower can be called a mortgagor and the lender a mortgagee. In a Deed of Trust, the borrower can be called a grantor or a trustor and the lender a beneficiary. In this guide, the borrower is called borrower and the lender is called the lender or the holder of the mortgage. 4 LOANLINER Home Equity System

14 General Information Before approving a loan, a title examination should be done to find who has rights in the property. In some areas, attorneys review abstracts of title which list all matters affecting the property and write an opinion of title telling the credit union who has rights in the real estate. In other areas, title insurance companies issue title insurance commitments showing who has rights in the borrower s real estate and agreeing to insure the title. In some areas, title insurance companies offer variable rate and revolving credit endorsement to protect lenders from specified risks. After the borrower signs the security instrument, the credit union records the security instrument in a local government office. A properly recorded security instrument places a lien against the real estate described in the security instrument. A lien is a claim against the property. The word encumbrance includes both liens and also other matters affecting title, such as an easement which lets a utility line run across the property. Under certain circumstances a person who has a lien can foreclose and sell the property to repay the debt. A person who has a lien is called a lienholder. If there is more than one lien against the property, all the liens are secured by the property. The different liens are arranged according to their priority. As a general rule, the lienholder who records earlier has priority over lienholders who record later. A lien has priority over other liens if it is entitled to be paid before the other liens are paid. In a foreclosure, the lien with the first priority is paid first. If there is sufficient money left, then the lien with second priority is paid. Only if there is still money left after the first lienholder and second lienholder have been paid in full is the lien with the third priority paid. Clearly, the better your priority, the better your chance of being repaid. Intervening liens are liens which come between other liens. For example, if a lien is recorded June 1, 2003 and another is recorded June 1, 2004 and another is recorded June 1, 2005, the 2004 lien is an intervening lien. Liens include mortgage, deeds of trust, tax liens, judgment liens, mechanics liens and other less common liens. A tax lien can be placed against real estate when real estate taxes or income taxes due from the owner of the real estate have not been paid. A judgment lien can be placed against real estate when a court has ordered the owner of real property to pay someone money as a result of a lawsuit and the owner has not paid. A mechanics lien can be placed against property when a construction worker has done work on the property and has not been paid. Mechanics include plumbers, electricians, roofers, and a wide variety of the others who build or repair homes. A lien is called prior, senior or superior to another lien if it will be paid before the other lien is paid. A lien is called subsequent, junior or inferior if it will not be paid until after the other lien has been paid. For example, if lien B will be paid after lien A but before lien C, lien B is subsequent, junior or inferior to lien A but prior, senior or superior to lien C. A second mortgage would be junior to a first mortgage but senior to a third mortgage. Open-End Lending 5

15 Open-End Loan Officer Checklist Loan Officer Checklist OPEN-END PLAN NUMBER SHARE/SHARE DRAFT ACCOUNT NUMBER APPLICANT S NAME PHONE NUMBER CO-APPLICANT S NAME PHONE NUMBER APPLICANT S ADDRESS CO-APPLICANT S ADDRESS 1 APPLICATION 2 PRELIMINARY REVIEW 3 CREDIT- WORTHINESS 4 EQUITY 5 APPROVAL OR DENIAL OF CREDIT OR 6 PREPARE DOCUMENTS OPEN ACCOUNT OR (a, b and c given to applicant at this time) a. Application b. Early Disclosure/Important Terms of Your Home Equity Plan c. Brochure/What You Should Know About Home Equity Lines of Credit a. Date application submitted b. Application Fee (if collected) c. Debt/Income Ratio d. Credit Denied and ECOA Notice Given, or Proceed with steps below a. Verification of Deposit b. Verification of Employment c. Verification of First Mortgage d. Residential Mortgage Credit Report e. Verification of Debt a. Appraisal b. Title Insurance or Opinion of Title c. Flood Hazard Determination d. Flood Notice (if applicable) a. Credit Denied and ECOA Notice Given b. Amount of line of credit approved $ a. Credit Agreement/Addendum b. Security Instrument c. Notice of Right to Cancel d. Insurance: Hazard Credit Disability Credit Life Flood e. Automatic Payment Authorization f. Voucher for First Advance g. Additional Credit Union Forms: h. 3-Day Right of Rescission Time Expired i. Right of Rescission exercised j. Funds Disbursed k. Payment of Fees l. Security Instrument Recorded m. Letter sent to prior Mortgage Holder CUNA MUTUAL INSURANCE SOCIETY, 1991, 2005, ALL RIGHTS RESERVED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED DATE (OPTIONAL) DATE (OPTIONAL) DATE (OPTIONAL) DATE (OPTIONAL) DATE (OPTIONAL) DATE (OPTIONAL) EST465 6 LOANLINER Home Equity System

16 Open-End Loan Officer Checklist Open-End Loan Officer Checklist Document Description When Used: The credit union may use this Checklist when processing each open-end home equity plan. Purpose: How Distributed: This document provides a checklist that your loan officer(s) may use in processing each open-end home equity plan. It provides a listing of the items that should be considered and the documents that must be given or received when processing a standard open-end home equity plan. It takes the loan officer through each standard processing step when opening a home equity plan. It starts at the time the application is given to the applicant (along with the Brochure and Early Disclosure) and ends with the closing of the plan. This document should be placed in member s file after it is completed. No. of Parts: 1 Imprinting: Special Notes: Optional - Credit union name, address, telephone number and logo This document will help meet the guidelines of NCUA Letter No It should be used by all your loan officer(s) to achieve consistency and accuracy for processing your home equity plans. Your credit union s loan policies should be written to cover each item outlined on this document. Open-End Lending 7

17 Open-End Loan Officer Checklist Loan Officer Checklist OPEN-END PLAN NUMBER SHARE/SHARE DRAFT ACCOUNT NUMBER APPLICANT S NAME PHONE NUMBER CO-APPLICANT S NAME PHONE NUMBER APPLICANT S ADDRESS CO-APPLICANT S ADDRESS 1 1 APPLICATION 2 2 PRELIMINARY REVIEW 3 3 CREDIT- WORTHINESS 4 4 EQUITY 5 5 APPROVAL OR DENIAL OF CREDIT OR 6 6 PREPARE DOCUMENTS OPEN ACCOUNT OR (a, b and c given to applicant at this time) a. Application b. Early Disclosure/Important Terms of Your Home Equity Plan c. Brochure/What You Should Know About Home Equity Lines of Credit a. Date application submitted b. Application Fee (if collected) c. Debt/Income Ratio d. Credit Denied and ECOA Notice Given, or Proceed with steps below a. Verification of Deposit b. Verification of Employment c. Verification of First Mortgage d. Residential Mortgage Credit Report e. Verification of Debt a. Appraisal b. Title Insurance or Opinion of Title c. Flood Hazard Determination d. Flood Notice (if applicable) a. Credit Denied and ECOA Notice Given b. Amount of line of credit approved $ a. Credit Agreement/Addendum b. Security Instrument c. Notice of Right to Cancel d. Insurance: Hazard Credit Disability Credit Life Flood e. Automatic Payment Authorization f. Voucher for First Advance g. Additional Credit Union Forms: h. 3-Day Right of Rescission Time Expired i. Right of Rescission exercised j. Funds Disbursed k. Payment of Fees l. Security Instrument Recorded m. Letter sent to prior Mortgage Holder CUNA MUTUAL INSURANCE SOCIETY, 1991, 2005, ALL RIGHTS RESERVED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED CHECK WHEN STEP COMPLETED DATE (OPTIONAL) DATE (OPTIONAL) DATE (OPTIONAL) DATE (OPTIONAL) DATE (OPTIONAL) DATE (OPTIONAL) EST465 8 LOANLINER Home Equity System

18 Open-End Loan Officer Checklist Completion Instructions The following information will be helpful to the loan officer when processing applications for open-end home equity plans. The Loan Officer Checklist takes you through each step usually taken when processing an open-end home equity plan. This information has been divided into six sub-headings below to correspond to the checklist headings on the preceding page. 1. Application Picked Up By Applicant At the time the applicant receives an application for an open-end home equity plan the member must receive one copy of each of the following: a. Application b. Early Disclosure Important Terms of Your Home Equity Plan required by Regulation Z Section 226.5b(d). c. Brochure What You Should Know About Home Equity Lines of Credit required by Regulation Z Section 226.5b(e). 2. Preliminary Review This section can be used to screen out applications clearly ineligible for the LOANLINER Home Equity Plan. a. Date Application Submitted Regulation B Section requires that the credit union notify the applicant of the credit decision within 30 days after a completed application is received. If the application is incomplete, the credit union has two options. The Official Staff Commentary for Regulation B Section 202.9(a)(1)3 states: When an application is incomplete regarding matters that the applicant can complete and the creditor lacks sufficient data for a credit decision, the creditor may deny the application giving as the reason for denial that the application is incomplete. The creditor has the option, alternatively, of providing a notice of incompleteness under Section 202.9(c). To meet this requirement, an Adverse Action Notice is available through LOANLINER Lending Systems. See this Guide for more information on the Adverse Action Notice. b. Application Fee (if collected) At the time the applicant submits an application, your credit union may collect an application fee which covers the cost of the appraisal, credit report, etc. However, this fee must be refundable for three business days from the time the applicant receives the Brochure and Early Disclosure as required by Regulation Z Section 226.5b(h). If the Brochure and Early Disclosure are mailed to the applicant, this fee must be refundable for six business days after the mailing as required by Regulation Z Section 226.5b(h)(10d). Open-End Lending 9

19 Open-End Loan Officer Checklist c. Debt/Income Ratio Your credit union should initially figure the applicant s debt to income ratio. NCUA Letter No. 124 requires a debt to income ratio used to qualify loan applicants be included in your lending policies. d. Credit Denied and ECOA Notice Given Based on the above preliminary steps, evaluate whether credit will be granted or denied. If credit will be denied send a copy of an Adverse Action Notice completed appropriately to meet Regulation B Section If credit is not denied proceed with the following steps. 3. Creditworthiness This section will help your loan officer(s) further determine an applicant s creditworthiness. This section precedes the section on equity because if a member is not creditworthy, the credit union can save the time and expense of appraising the home and conducting a title examination. If a member does not have the ability to repay, a LOANLINER Home Equity Plan should not be opened, no matter how much equity a member may have in the home. a. Verification of Deposit A Request for Verification of Deposit should be obtained from each depository institution the applicant(s) or other persons (co-applicant, spouse or former spouse) indicates on the application. Your credit union should have the applicant(s) or other person sign each verification of deposit before sending to the depository institution. The Request for Verification of Deposit is available through LOANLINER Lending Systems. For further details, please refer to the Verification of Deposit Completion Instructions section of this Guide. b. Verification of Employment A Request for Verification of Employment should be obtained from each former and current employer indicated by the applicant(s) or other person for the period of time your credit union had decided you want verified. The credit union should have the applicant(s) or other person sign each verification before sending to the former or current employers. The Request for Verification of Employment is available through LOANLINER Lending Systems. For further details, please refer to the Verification of Employment Completion Instructions section of this Guide. c. Verification of First Mortgage A Request for Verification of Mortgage should be used to obtain direct verification of mortgage payment history from the institution indicated on the application. Many special situations may arise. These must be evaluated by a 10 LOANLINER Home Equity System