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It was not so long ago that traditional installment lenders made residential real estate loans in the nature of home equity loans. Often these loans were sub-prime. The licensing for personal property lending and home equity lending was often the same.  The promissory notes were not so different. The Truth-in-Lending Act requirements were not so much greater either.

However, things began to change when home equity lending increased substantially in the 1980s.   Congress added to the Consumer Credit Protection Act (the body of law of which the Truth-in-Lending Act [TILA] is a part) by adopting a new chapter titled the Home Equity Loan Consumer Protection Act of 1988.  And then, with the passage of the Home Ownership and Equity Protection Act of 1994, Congress mandated that a specific category of loans deserved heightened disclosure and, to some degree, substantive regulation by TILA.  As a result, Regulation Z added special rules for certain home mortgage transactions requiring additional disclosure requirements for what was deemed and called “High-Cost Mortgages” or “Section 32 Loans.”

And finally, in 2010, with the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act, new requirements for all types of mortgage lending were added to law, including:

• Minimum qualification standards for mortgage loans with an ability to repay requirement
• Additional escrow account requirements
• Adoption of a combined TILA-Real Estate Settlement Procedures Act disclosure statement
• Strengthening appraisal requirements
• Delineating specific deceptive and abusive acts and practices in mortgage lending

What all of this legislative activity led to was the exodus of most traditional consumer finance companies from the residential real estate mortgage marketplace.  That is, home equity lending became a very specialized product, not offered by anyone except the big mortgage companies, banks, and credit unions.  

The landscape of home equity lending has changed dramatically since the 1980s. Still, it may be time for consumer finance companies to rethink home equity lending. Consumer finance companies are always looking for new markets and new products to offer.   Home equity lending may be such an opportunity.  While the rules and regulations are stringent, compliance is certainly achievable.   And, for those who are willing to come back into this market, the cost of compliance may well be worth the effort.

Of course, offering the product—with its higher loan amounts and tougher regulatory standards—certainly requires care and due diligence.

Please note: This is the one hundred thirty-second blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.