Is Your HELOC Testing Program On Pace?
Home Equity Lines of Credit (HELOCs) remain a popular financial tool, but they also come with significant regulatory scrutiny. Are you confident your testing program is robust enough to protect your institution and your borrowers? Now is the perfect time to establish or re-evaluate your HELOC testing.
Focus on these three key areas:
1. Important Terms Disclosure:
This is the borrower's first impression. Is the information clear, concise, and accurate? Does the disclosure accurately reflect the terms being offered? Key areas to test include:
APR Accuracy: Are the variable rate calculations and disclosures precise?
Draw Period and Repayment Period Clarity: Are these periods clearly defined and understandable?
Fee Disclosure: Are all fees, including application, appraisal, and annual fees, clearly stated?
Truth-in-Lending Act (TILA) Compliance: Does the disclosure meet all regulatory requirements?
2. The Closed Loan Credit Agreement:
This document formalizes the HELOC terms. Does it align perfectly with the initial disclosures? Test for:
Consistency with Disclosures: Do the interest rate, payment terms, and fees match the initial disclosures?
Accurate Legal Language: Is the legal language precise and compliant with applicable regulations?
Clear Payment Calculation Methods: Are the calculations for minimum payments clearly defined?
State-Specific Requirements: Does the agreement adhere to any state-specific regulations?
3. The Periodic Statements:
These statements provide ongoing transparency. Are they accurate and easy to understand? Test for:
Accurate Balance and Interest Calculations: Are the calculations correct and verifiable?
Clear Transaction History: Is the transaction history detailed and easy to follow?
Accurate Payment Application: Are payments applied correctly to principal and interest?
Compliance with Statement Requirements: Does the statement include all required information, such as the current APR and available credit?
The Importance of Consistency:
The core of effective HELOC testing lies in ensuring consistency across these three areas. Any discrepancies between the important terms disclosure, the credit agreement, and the periodic statements can lead to:
Regulatory violations and penalties.
Borrower confusion and disputes.
Operational errors in loan servicing.
Reputational damage.
A Deeper Dive:
If your testing reveals inconsistencies, it's time for a deeper evaluation. This may involve:
Reviewing your loan origination and servicing systems.
Enhancing your quality control processes.
Providing additional training to your staff.
Consulting with compliance professionals.
By prioritizing a robust HELOC testing program, you can ensure compliance, protect your borrowers, and maintain the integrity of your lending practices. Don't wait until a regulatory exam to discover potential issues. Take proactive steps today to safeguard your institution. Contact the team at SCA today!
