This is why home equity loans are the tomatoes of the financial field

Do you remember the first time you learned tomatoes are not actually vegetables? It was pretty unsettling, wasn’t it? It’s kind of how some credit union professionals feel when they discover home equity loans (HELs) are not actually considered mortgage products. Ok, they can be. But they can also be considered credit products. And when they are categorized as such, the regulatory requirements change completely.

As a kid, I spent a lot of time on my grandparents farm, a 100+ acre slice of agricultural heaven my grandma still owns today. I was fascinated by the “vegetable garden,” which was packed with cucumber, squash, potatoes, and my favorite, tomatoes. I’ll never forget the day I learned the truth about tomatoes. Wow. But, as vivid the memory, I never thought I’d one day relate that awakening to my work. Oddly enough, I see the same enlightening happen often as the credit unions I work with confront the distinctions between HELs.  

Like the tomato, the HEL can be considered one of two things, closed- or open-end. Reg Z is the go-to source for understanding the difference between the two. Under Reg Z, closed-end is anything that does not meet the definition of open-end. Open-end credit is defined as having the following characteristics:

• The creditor reasonably contemplates repeated transactions;
• The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and
• The amount of credit that may be extended to the consumer during the term of the plan is generally made available to the extent that any outstanding balance is repaid.

Simple enough right?

So where does the confusion lie? Typically, it stems from the practice of defining HELs broadly as “mortgage products.” Doing so often leads credit unions down the wrong compliance path. Until you define the loan as closed- or open-end, you can’t follow the proper path to the proper regulatory requirements.

A great way to illustrate this is by looking at some of the differences between the two. In the case of home equity lines of credit (HELOCs), credit union staff can bypass TILA/RESPA Integrated Disclosure Rule (TRID) requirements. There is no need to provide Loan Estimates or Closing Disclosures for that product. The same goes for the ability-to-repay rule.

All that said, a new hurdle may be the recent changes to the HMDA rule, requiring credit unions that offer HELOCs over a certain threshold to report those loans right along with their closed-end loans beginning with 2018 data.

A great way to ensure your staff is headed in the right compliance direction for each HEL they manage is to originate these loans in the appropriate department. For instance, putting HELOCs, which are open-end HELs, under the purview of the consumer department keeps those loans with staff already knowledgeable on consumer loan compliance.  The same is true for keeping closed-end HELs inside the mortgage department.

It’s still very hard to get a consistent answer on whether a tomato truly is a fruit, or is in fact, as childhood Jeremy insisted standing in my grandma’s garden, a vegetable. It really just depends who you’re asking. If you are talking to a botanist, it is a fruit because it grows from a vine and houses a soft center that contains seeds. If you’re talking to a chef, though, a tomato is and always will be a vegetable because of its delish, savory flavor. As with a HEL, context is key. Unfortunately, regulators are much less willing to debate than botanists, chefs and grandkids.