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Home Equity Loans – The Tomato of Financial Products

As a kid, I spent a lot of time over at my grandparents during the summer helping plant and care for the big ole vegetable garden they had in the side yard. Now my grandparents were no amateurs when it came to planting. To this day my Grandma still owns a 100+ acre slice of farming heaven. But for me that wasn’t the fun stuff because the only thing out there was either corn or beans. I was more interested in that colorful garden that was packed with cucumber, squash, potatoes, and tomatoes. That is why I became confused when I first heard someone say that a tomato was a fruit. I was like “no way, go ask my Grandma”. Come to find out, technically a lot of vegetables are “fruits”, it just depend on the context. I never thought I would be able to relate that to work, but oddly enough I have seen this same confusion when it comes to home equity loans and how they are supposed to be approached from a compliance stand point.

Like the tomato, the home equity loan (HEL) can be considered one of two things. It can be a closed-end product or an open-end product. To understand the difference between the two, you may need a little Reg Z definition refresher. Under Reg Z open-end credit is defined as consumer credit in which:

  • 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.

For closed-end, it is simply anything that does not meet the definition of open-end. Simple enough right?

I think a lot of the confusion comes from the HEL product being defined broadly as a “mortgage” product. That is why it is important to see HEL as more than just mortgage products, but instead see them as open and closed-end products. Starting there allows you to follow the proper path when it comes to finding the proper requirements. That is also why you see a lot of credit unions originate their home equity lines of credit (HELOC) within a consumer department, and originate their closed-end HEL within the mortgage department.

Having this basic starting point allows you to better identify where you need to go when it comes to finding out what is required. You can now solve the mystery on if an intent to proceed is needed on your HELOC’s (No, because it is a closed-end requirement).

To this day you will not get a consistent answer on if a tomato is a fruit or a vegetable. It will all depend on what you are looking for. If you are asking from a biological stand point, it is a fruit since it grows from a vine and houses a soft center that contains seeds. But if you were to ask from a culinary stand point, it is considered a vegetable because of its savory flavor. Like HEL, context is key!

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