Truth-In-Lending Issues Triggered By Home Equity Loan Product - Q3 1999

A borrower is given the option of converting all or a portion of the available credit on the home equity line to a fixed rate at the bank's interest rate on second mortgage loans at the time the conversion option is exercised. Mass. Gen. Laws chapter 140D, the Commonwealth's Truth-In-Lending statute, and its implementing regulation set forth at 209 CMR 32.00 et seq . impact these facts. The regulation at 209 CMR 32.05B(6) prohibits a creditor from changing the annual percentage rate on a home equity line of credit unless such change is based on an index outside of the creditor's control and such index is available to the general public.

Regulation Z Staff Commentary at 226.5(b)(d)(5)(ii) states that a creditor must disclose "the specific rate or a description of the index and margin that will apply upon the exercise of this choice." It is the Division's position that the requirement to disclose a specific rate means a predetermined, specific numerical rate. Accordingly, a reference to an interest rate on certain second mortgage loans would not comply with this disclosure requirement.