What Laws Regulate Home Equity Lenders?

Rules That Protect Borrowers

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Home equity loans are second mortgages that allow you to borrow against the equity you have in the home. A home equity line of credit (HELOC) is another borrowing option, in which homeowners can access a revolving credit line for a specified period of time. 

Because home equity loans add to your overall debt and monthly expenses—and use your home as collateral—it’s especially important to be sure you work with a reputable lender. Luckily, there is a handful of home equity loan regulations to protect consumers.

Learn more about the rights borrowers have, how to avoid becoming a victim of lender fraud, and what to do if you encounter suspicious behavior.

Key Takeaways

  • Regulations for home equity borrowing relate to information disclosure, fees, and credit lines. 
  • Lenders must disclose all loan details so there are no surprise fees or terms later on.
  • Borrowers should confirm that fees are legally permitted and listed in their contract.
  • If your home value decreases significantly after you take out a HELOC, your credit line may be reduced. 
  • If you think your lender has broken regulations, you can report it to multiple government agencies.

Disclosure Laws for Home Equity Loans

There are home equity loan regulations that protect consumers from predatory lenders who may try to discourage the borrower from reading or understanding all of the terms, conditions, or fees in their contract. Specifically, disclosure laws say that lenders must be upfront about details like the loan’s APR, fees, renewal terms, and more. 

All such information must be included either in the application itself, or as a separate form, and must be “clear and conspicuous.” In other words, lenders can’t simply bury or try to hide loan terms in tiny type within a massive legal document, or decide to withhold information. 

Some examples of information that a lender must disclose:

  • APR: The annual percentage rate has to be even more visible than other required disclosures, because it is a more comprehensive figure. It factors in the interest rate, as well as any fees that are due. As a result, it is typically higher than the interest rate and must be more prominently displayed.
  • Payment terms: The lender has to clearly explain the payment terms, including specifics of the draw period, the repayment period, and how minimum payments are determined to ensure that borrowers understand their obligations. 
  • Fees: Any fee charged by the lender or a third party needs to be itemized as part of a good faith estimate.
  • Options: Some lenders have home equity loan programs that may involve different variable rates or payment options. A creditor can either include everything a consumer needs to know about the various programs in one document, or in separate ones. If a lender decides to use separate disclosures, it must encourage the consumer to ask about the other options.
  • Conditions: Consumers must be told how long they have to submit an application to qualify for specific terms, and which terms may be subject to change. They must also be made aware of any actions the lender can take and under what circumstances. For example, it must be stated in writing as to what may trigger the lender to call in the loan or reduce the credit limit.

Note

Variable-rate home equity loans require even more disclosures so consumers understand exactly how and when rates change.

In addition to the loan specifics, lenders must also provide borrowers with a home equity brochure entitled “What You Should Know About Home Equity Lines of Credit” from the Consumer Financial Protection Bureau (or provide an equivalent replacement).

The disclosures and the brochure must be provided with the application. If customers apply over the phone or through the mail, the lender must send the disclosures no more than three business days after receiving the application. However, lenders are allowed to provide an electronic copy rather than a hard copy if they so choose.

Fees on Home Equity Loans

You should expect to pay a number of fees when you get a home equity loan because it’s a second mortgage. Common fees that are legally allowed include:

  • A home appraisal fee
  • An application fee, which may or may not be refundable 
  • Discount “points” to help lower your interest rate
  • Closing costs such as title search fees, administrative fees, property and title insurance, and taxes

Depending on the terms of your loan, you may have to pay:

  • Annual or monthly maintenance fees
  • Transaction fees when you make withdrawals on a HELOC 
  • An inactivity fee if you don’t draw on the credit line
  • Early termination or cancellation fee if you close the HELOC within a couple of years, although the exact timeline will vary depending on your lender and your contract

The Three-Day Rule

When you take out a home equity loan or HELOC, you have three days after the closing to change your mind. If you do this, any fees you paid must be refunded by the lender within 20 days.

Warning

Predatory or unscrupulous lenders may try to charge you improper fees, like late fees that aren’t mentioned in your contract or that are much higher than other lenders’. Or, they may not provide accurate account statements or payoff figures.

If you notice strange fees or actions that do not appear in line with your contract, contact your lender. If it turns out that your lender has violated the terms of your agreement, contact one of the regulatory agencies that oversees this process (mentioned in the “How To Report Lender Fraud” section below).

Credit Limits on Home Equity Loans and HELOCs

When evaluating your home equity loan or HELOC application, lenders look at the appraised value of your home and the balance you owe on your mortgage to determine your credit limit

For example, say your home is appraised at $200,000 and the lender allows you to borrow up to 85% of the home value minus the balance you owe. You’re carrying a $150,000 mortgage balance, so you could borrow up to $20,000. ($200,000 x 0.85 = $170,000. $170,000 - $150,000 = $20,000.) 

Note

The percentage of home value or the amount you’ll be allowed to borrow against your home equity can vary depending on your lender. Most requirements are in the ballpark of 80% to 85%, though you may find an outlier that goes up to 90%.

Of course, lenders will also take a look at your ability to repay that amount using your credit history and income information before you are approved.

Freezing and Reducing Credit Lines

Because the HELOC hinges on the equity amount you have in the home at a specific point in time (the day your home is appraised), a fluctuating home value could impact your borrowing power.

In fact, federal law allows the bank to decrease or freeze a HELOC credit limit if there is a "significant decline" in the property value. (This should be stipulated in your disclosures.) You could appeal this decision, but it will typically involve getting a new appraisal.

For example, lenders may take action if the initial difference between the credit limit and the available equity is reduced by 50% or more. Using the example above in which the difference between the available equity and what you owed on the mortgage plus the equity line was $20,000, if that difference decreases to $10,000 or less, the bank could freeze or reduce the credit limit. So if your original home value goes from $200,000 to $185,000, that could prompt the bank to reduce your available credit line to $7,250. 

Should this happen, the bank is obligated to let you know in writing within three business days of reducing or freezing your HELOC, and include the specific reasons why your account was reduced or frozen.

How To Report Lender Fraud

If you are concerned that your lender has violated your contract or the law, you do have options. First, begin investigating to make sure your suspicions are warranted. Start by looking back through your application and contract disclosures. If you did not look into this lender’s history prior to signing your contract, check the Consumer Financial Protection Bureau’s Consumer Complaint Database and conduct an internet search to see if the company has a history of this type of activity.

If some type of fraud has taken place, follow these steps.

First, contact the lender or servicer to see if an error was made, and give it a chance to correct the mistake. If the lender is uncooperative, consider reaching out to an attorney.

In order to protect yourself and others from lender fraud in the future, you can report the fraud by filing a dispute online or calling:

Frequently Asked Questions (FAQs)

How can I calculate my home equity?

To figure out if you've built up enough equity to borrow from it, start with some quick math. Divide your current mortgage balance by the home’s current value. So if you have a $200,000 balance on your mortgage, and your home is valued at $500,000, your equity would be 40%.

Can you figure out your home value without an appraisal?

To get an official equity amount, you’d need to get an appraisal. However, you can estimate home value by doing your own research first using online tools like Zillow or Trulia. You can also contact a real estate agent to run a comparative market analysis for you.

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