Ben Giumarra

Lenders always expect HELOCs to be simpler than closed-end mortgages. Well, they are to some extent – exempt from tricky regulations like the Ability-to-Repay Rule and TILA-RESPA disclosures. But there are a couple of twists to requirements surrounding home equity lines of credit – especially regarding late payments and prepayment penalties.

Let’s go through two questions:

1. Are there any limits to late charges for HELOCs when lending in Massachusetts?

2. Are there any limits to pre-payment penalties for HELOCs when lending in Massachusetts?

Late Charges

Massachusetts actually limits late charges on HELOCs to 10 percent or $10, whichever is less. A common mistake made here is to apply the Massachusetts rule that limits late charges to 3 percent of the overdue principal and interest.

While the general rule (Chapter 183, Section 59) appears to apply to all loans, the Division of Banks has provided clear guidance (Opinion 95-130) interpreting this generic rule not to apply. Instead the division applies a rule specific to HELOCs, which is MA Chapter 140, Section 114B. This rule limits late charges to 10 percent or $10, whichever is less.

Are your loan docs correct? This can trip up a lender operating in several different states, rather than specializing in Massachusetts only.

Note: There are no federal limitations on HELOC late charges except when the high-cost rules are triggered, and then late charges are generally limited to 4 percent of the amount overdue.

Prepayment Penalties

So we know pre-payment penalties got the cold shoulder under the Dodd-Frank Act – the Consumer Finance Protection Bureau’s ensuing regulations drastically limited our ability to impose them on closed-end loans. HELOCs largely escaped this (as they did many Dodd Frank/CFPB rules). But is this any different in the Bay State?

While there is a general “prepayment statute” in Massachusetts, this actually does not apply to HELOCs. Here again, there would be serious confusion about whether this general statute applies to HELOCs (instead of just closed-end loans) were it not for crystal clear guidance from the Division of Banks. In a 2004 advisory letter, the division settled once and for all that the pre-payment penalty statute does not apply to HELOCs, despite the prepayment statutes broad language that seems to apply to all loans.

This is still a common mistake made – so scrub this from your HELOC notes and disclosures!

At the federal level, there is no direct rule against pre-payment penalties in any regulation. However, be careful that your HELOC product doesn’t trigger high-cost regulations by allowing for a prepayment penalty to either (a) be charged more than 36 months after account opening OR (b) exceed 2 percent of the initial credit limit.

So a couple of key points here:

You don’t have to actually charge the penalty – accidentally leaving it in the note or one of the disclosures appears to be enough – so a mistake here will leave your HELOCs all automatically classified as high-cost.

High-cost regulations are not to be trifled with – best to avoid this whenever possible. Among other things, this would impose Ability-to-Repay-like requirements on HELOCs.

There is a pretty major exception from all this. A “reimbursement fee” is not a “pre-payment penalty.” A fee charged when a borrower cancels a HELOC early that is merely to recover the cost of a waived third party fee is not considered a pre-payment penalty (if it is limited to 36 months from account opening). See Truth in Lending Act regulation 1026.32(b)(6) for details.

Ben Giumarra is a risk management consultant with Spillane Consulting. He may be reached at BenGiumarra@SCAPartnering.com or (781) 356-2772.