Sensing the potential in accumulated home equity, some West Coast lenders have been promoting open-end credit arrangements with the house pledged as security. Until now truth-in-lending regulations required that lenders give consumers a three-day cooling-off period and the right to cancel the deal every time they used that credit. Recently the Federal Reserve discontinued the requirement in third-party transactions.
The equity an owner has built up in a home can be a vital source of funds for putting children through college, making some major purchase or meeting a financial misfortune.The traditional way of utilizing this non-liquid asset is to take a second mortgage for a fixed amount and fixed terms. A more flexible way is to draw on the equity as needed through an open end credit arrangement, as one uses a credit card or writes overdrafts on a checking accounts.
However, credit card Companies and other lenders have found it impracticable to notify borrowers who have pledged their houses of their rights each time they utilize the credit. In suspending the requirement, the Fed acknowledges that consumers will have somewhat less protection against loss of their houses by defaulting on their credit. But at the same time removal of the requirement will enable lenders to expand the program to many more people.
Lenders will now have to give a three-day cancellation notice only when the open end credit plan is first established, when the credit limit is raised or the interest rate changed, or when a house is added as security to an existing open end arrangement. An annual reminder that the home has been pledged as security is still mandatory.
This change is Regulation Z, or the Right of Rescission, still applies to two-party transactions. An example of such a case would be where a seller of building supplies agrees to accept a house as security against periodic purchase of materials. As these transactions generally involve a lot of money, the credit grantor would still be obliged to tell the borrower each time he made a purchase that he has three days in which to cancel if he wishes.