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Summary of Findings:
Design and Testing of
Truth in Lending Disclosures
for Home Equity Lines of Credit

July 16, 2009

Submitted to:
Board of Governors of the
Federal Reserve System

Submitted by:
ICF Macro

TABLE OF CONTENTS
Executive Summary ....................................................................................................... i
Background and Description of Project ....................................................................... i
Summary of Methodology ...........................................................................................ii
Summary of Key Findings ..........................................................................................iii
Chapter I: Introduction.................................................................................................. 1
Background ................................................................................................................ 1
Methodology .............................................................................................................. 2
Chapter II: Guiding Principles for Disclosure Design ................................................ 4
Chapter III: Testing of Revised Disclosure Forms...................................................... 6
Interviews in Bethesda, Maryland (December 17-18, 2008) ...................................... 6
Objectives and Methodology.............................................................................. 6
Key Interview Findings ....................................................................................... 7
Subsequent Design Decisions ......................................................................... 13
Interviews in Los Angeles, CA (February 11-12, 2009)............................................ 15
Objectives and Methodology............................................................................ 15
Key Interview Findings ..................................................................................... 16
Subsequent Design Decisions ......................................................................... 21
Interviews in Chicago, Illinois (March 24-25, 2009).................................................. 23
Objectives and Methodology............................................................................ 23
Key Interview Findings ..................................................................................... 24
Subsequent Design Decisions ......................................................................... 29
Interviews in Denver, Colorado (April 14-15, 2009) ................................................. 31
Objectives and Methodology............................................................................ 31
Key Interview Findings ..................................................................................... 31
Subsequent Design Decisions ......................................................................... 36
Interviews in Bethesda, Maryland (May 5-6, 2009) .................................................. 37
Objectives and Methodology............................................................................ 37
Key Interview Findings ..................................................................................... 38
Subsequent Design Decisions ......................................................................... 41
Chapter IV: Summary .................................................................................................. 44

Appendices:
Appendix A: Sample Recruitment Protocol
Appendix B: Participant Demographic and Background Information
Appendix C: Disclosure Forms Used in Testing

EXECUTIVE SUMMARY
BACKGROUND AND DESCRIPTION OF PROJECT
In 1968, Congress enacted the Truth in Lending Act (TILA) to protect consumers by requiring
lenders to provide key pieces of information to consumers at various points in time. Congress
assigned the Federal Reserve Board (the “Board”) the responsibility of implementing TILA, and
the Board currently does so through Regulation Z.
In 2004, the Board began the process of reviewing Regulation Z to determine whether revisions
were necessary. In January 2009, the Board finalized amendments to Regulation Z rules
applicable to open-end (not home secured) credit (e.g., general purpose credit cards, merchantspecific credit plans, and overdraft lines of credit).1 The Board is currently in the process of
reviewing disclosures under Regulation Z related to home-secured open-end credit—namely,
home equity lines of credit, and closed-end mortgage disclosures. This report is related to the
Board’s review of disclosures for closed-end mortgage loans. One of the goals of this review is
to ensure that the amended regulations lead to improved disclosures that consumers would most
likely pay attention to, understand, and be able to use in their decision-making.
This report addresses to the Board’s review of disclosures related to HELOCs. One of the goals
of this review is to ensure that the regulations lead to disclosures that consumers would most
likely pay attention to, understand, and be able to use in their decision-making.
Under Regulation Z, HELOC borrowers must receive the following three types of disclosures, in
addition to others:
•

Application Disclosure: The regulation currently requires that an application disclosure be
provided to potential borrowers at the time an application for a HELOC is provided. This
disclosure provides details about the lender’s HELOC plan, including the length of the draw
and repayment periods; how the minimum required payment is calculated; payment
examples; and what fees are charged by the lender to open, use, or maintain the plan.
Because this disclosure is provided before underwriting takes place, this disclosure does not
include information that is dependent upon a borrower’s creditworthiness, such as the annual
percentage rate (“APR”) that the lender will offer.

•

“What You Need to Know About Home Equity Lines of Credit” Brochure: This booklet
(the “HELOC brochure”) is produced by the Board and has no transaction- or programspecific information. It provides consumers with general information about HELOCs and
how they work, as well as a glossary of relevant terms, and a description of various features
that can apply to HELOCs. The Board currently requires lenders to provide this brochure to
consumers at the same time as the application disclosure.

As of the writing of this report, the Board is in the process of revising these rules in light of legislation passed by
Congress in May 2009.

•

Account-Opening Disclosure: The regulation currently requires that an account-opening
disclosure be provided to potential borrowers before they commit to opening a HELOC. This
disclosure includes detailed transaction-specific information, including the APR and fees that
will be charged.

In December 2008, the Board contracted with ICF Macro to assist the Board with its review and
revision of these disclosure forms. ICF Macro is a research and evaluation company with
expertise in the design and cognitive testing of effective consumer communication materials.
ICF Macro worked with the Board on its review of credit card disclosures and is currently
contributing to its review of Regulation Z rules for closed-end mortgage disclosures.
Since December 2008, ICF Macro has conducted five rounds of one-on-one cognitive interviews
with a total of 50 participants. For each round, ICF Macro developed a set of model disclosure
forms to be tested. Interview participants were asked to review model forms and provide their
reactions, and were then asked a series of questions designed to test their understanding of the
content. Data were collected on which elements and features of each form were most successful
in providing information clearly and effectively. The findings from each round of interviews
were incorporated in revisions to the model forms for the following round of testing.
The findings from the consumer testing informed the Board’s proposed revisions to Regulation Z
rules for HELOCs, which the Board will publish for public comment in July 2009, together with
the model forms.

SUMMARY OF METHODOLOGY
Five rounds of testing were conducted, each consisting of 10 interviews of approximately
90 minutes in length. In each interview, the participant was shown several mock disclosure
documents and asked to review them just as they normally would for their own account. They
were asked to “think aloud” while doing so—in other words, to describe what they were thinking
as they read, and to indicate if they saw anything that they found interesting, surprising, or
confusing. When the participant indicated whether he or she was finished, the interviewer asked
a series of follow-up questions to test the participant’s understanding of the document.
Participants in each location were recruited by telephone using a structured screening instrument
to ensure the selection of a range of participants in terms of gender, age, and ethnicity. Most
participants had HELOCs while some considered getting a HELOC but opted instead for a home
equity loan. A few participants did not have a home equity loan or HELOC, but had considered a
HELOC in the past five years.

SUMMARY OF KEY FINDINGS
The following is a summary of key findings from the cognitive testing and the most significant
design decisions that were made based on key findings. Some of the research focused on very
specific aspects of the content or format of these forms, but this summary focuses primarily on
the larger issues diagnosed and addressed during the testing process.

Findings Related to Application and Account-Opening Disclosures
Timing of Application Disclosure/Creation of “Early” Disclosure
•

Several participants in the first two rounds of testing became confused when reviewing the
application disclosure because they could not find their interest rate, and were surprised when
told that the rate was not on the form. Other participants incorrectly assumed that one of the
rates shown in a payment example on the application disclosure was being offered to them,
when in fact that rate was used only for illustrative purposes.

•

ICF Macro’s testing of closed-end mortgage disclosures 2 conducted during the same time
period had shown that participants strongly disliked a disclosure form that lacked specific
terms and features because such general information was not useful to them. Participants in
closed-end testing were shown an initial adjustable-rate mortgage (“ARM”) program
disclosure which, like the HELOC application disclosure, is provided with the application
and does not provide transaction-specific information. Overwhelmingly, participants
indicated that because of its lack of specificity, they would not find the initial ARM program
disclosure useful and would be unlikely to read it. While participants in HELOC testing were
not as vocal in their dislike of the application disclosure, some of the same sentiment was
apparent.

•

Based on the results from the first two rounds of testing and similar findings from the closedend testing, Board staff had concerns about the usefulness of the application disclosure for
participants. To address this issue, Board staff decided to test a new type of disclosure: an
“early” disclosure of transaction-specific information that would be provided not later than
three business days after application (similar to an early TILA disclosure for closed-end
loans). The content of this new HELOC disclosure would be similar to the application
disclosure, except that it would include information specific to the consumer based on initial
underwriting—most notably, the specific APR and credit limit. Model forms for the early
disclosure were tested for the first time in Round 3 and participants overwhelmingly
indicated that they would prefer to receive a transaction-specific disclosure soon after
application, even if it meant that they would not receive a disclosure of generic terms before
they applied. As a result, the remaining two rounds of testing focused on developing, testing
and refining an early transaction-specific disclosure, rather than a generic application
disclosure of the type that is currently required.

ICF Macro will submit findings related to its design and testing of closed-end mortgage disclosures to the Board
under separate cover; this report will be published with the Board’s proposed revisions to Regulation Z in July 2009.

iii

General Structure of Disclosures
•

Participants in the first two rounds of testing were shown an application disclosure based on
a sample disclosure conforming to the existing application disclosure samples in Regulation
Z and currently in use by a financial institution. This form provided required information in a
mostly narrative format. Participants found this form difficult to read and understand, and
their responses to follow-up questions showed that it was also difficult for them to identify
information in the text. When the same information was presented in a tabular format,
participants commented that the information was easier to understand and had more success
answering comprehension questions. As a result, after Round 2 of testing the decision was
made to use a tabular format for all model disclosure forms.

Annual Percentage Rate (APR)
•

Most disclosures that were used in early rounds of testing included a statement that the APR
on a HELOC does not include costs other than interest, as currently required by
Regulation Z. The purpose of this requirement is to make clear to consumers that an APR on
a HELOC cannot be directly compared to an APR on a closed-end loan, which includes most
fees. However, many participants misunderstood this sentence; for example, some incorrectly
thought they would not be charged any fees. Just as important, no participants understood the
purpose of this statement, or how they could use the information when applying for a home
equity product. Different versions of this statement were tested in several rounds to attempt
to improve comprehension, but all versions were unsuccessful in communicating to
consumers the statement’s intended purpose. As a result, this statement was eventually
removed from the disclosures.

•

Some disclosures that were tested did not describe exactly how the APR for the line of credit
would be determined; for example, one form in Round 4 indicated only that the APR “would
vary monthly with the Prime Rate.” However, participants consistently indicated that they
preferred to be shown more detailed information about how their APR would be determined
over time. Therefore, the final model early disclosure forms include the specific margin
added to the index to calculate the APR.

Fees
•

All of the application and early disclosure forms that participants were shown included a
range of the total of one-time fees that the borrower could be charged for opening the
account. Some forms also provided a breakdown of account-opening fees into four categories
(loan origination, loan discount, underwriting, and appraisal). Participants consistently said
that they preferred to have the more detailed breakdown of fees to help them understand what
they would be paying. As a result, this level of detail was included in the final model early
disclosure form.

•

In several rounds of testing, participants were shown versions of a table that itemized
account-opening fees, penalty fees and transaction fees. Participants were asked which of
these fees were most important for them to know as part of the early disclosure. Most
participants indicated that it was most important for them to be provided an itemization of the

fees required to open the account in the early disclosure so that they could better understand
the costs of opening the HELOC plan. As a result, the total of the account-opening fees and
their itemization (as discussed above) were included in the final model early disclosure form,
but transaction fees and penalty fees were not included. Several participants indicated that
they would also want to know if they would be charged any fees if they were to open an
account, not make any advances and close it within a year. Since several participants
indicated that they opened up a HELOC as a “safety blanket,” with an intent not to borrow
any funds unless there was an emergency or a job loss, Board staff felt that for such
consumers it would be important to disclose upfront all fees to open, cancel, and maintain an
account. As a result, the early disclosure that the Board is proposing also shows fees imposed
by the creditor for the availability of the plan (e.g., annual fee), fees for early termination of
the plan by the consumer, and fees for required credit insurance or debt cancellation or
suspension coverage.
•

The final model account-opening disclosure that the Board is proposing includes all fees
shown on the early disclosure, as well as a breakdown of penalty and transaction fees.
Participants who were shown this disclosure during testing indicated that they found this list
sufficient, and could not identify any additional types of fees that they would want disclosed
to them.

•

Some of the forms that were tested included a statement that other types of fees not listed on
the form may apply; other forms did not include this statement. Most participants who saw
forms without this reference incorrectly assumed that all fees were listed on the accountopening disclosure and that no other fees would apply. As a result, this statement is included
on the final model forms.

Draw and Repayment Periods
•

The forms that participants were shown in Round 1 included information about the “draw”
and “repayment” periods associated with the line of credit. Most participants in this round
indicated that the term “draw period” was unclear to them, so in Round 2 two alternate terms
were tested: “borrowing period” and “withdrawal period.” Participants in that round strongly
preferred the term “borrowing period,” so all subsequent model forms used this phrase.

•

Forms in Round 2 also referred to the “payoff period” as an alternate term for the “repayment
period,” which had caused some confusion among participants in Round 1. However,
ICF Macro and Board staff were concerned that this phrase might imply to consumers that
they would be fully paying off their balance over this period, when in fact a sizable balloon
payment could be due at the end of the HELOC term. Since there was no evidence that the
phrase “payoff period” was any more understandable than the original term “repayment
period,” and some consumers indicated that the term “payoff” would imply paying off the
balance in full, all subsequent forms referred to the “repayment” period.

•

Participants in early rounds had a great deal of difficulty understanding the timing of the
draw (or borrowing) and repayment periods. For example, several incorrectly thought that the
two periods ran concurrently, or that the repayment period began as soon as money was
borrowed. Revised disclosure forms clarified the relationship between these two periods by

highlighting the distinctions between them and by including information about the timing of
the periods (e.g., “Years 1-10”) in sample payment tables. These revisions were effective;
participants in later rounds understood that the two periods would run subsequently and that
the repayment period would begin at the end of the borrowing period.
Historical Example Table
•

In Rounds 1 through 3, many participants misunderstood the information provided in the
historical payment example table currently required by Regulation Z to be included in the
application disclosure. In reviewing versions of both application disclosures and early
disclosures containing the required historical payment example table, a large group of
participants did not understand that the information in this table was based on the actual
historical behavior of interest rates; they instead assumed that the data shown was a
hypothetical example, and dismissed it as not very useful because it did not apply to their
HELOC. Even after the meaning of the table was explained to them, many participants
indicated that, because these numbers were based on what had happened to the interest rate in
the past 15 years, the table did not contain any valuable information that would inform their
decision making about the HELOC for which they were applying. More significantly, an
even larger group of participants concluded that the rate and payment information shown in
the historical example table would apply to their HELOC and erroneously indicated that the
table showed their exact monthly payments. When the numbers in the table were explained to
them, most of these participants concluded that the information presented in the table was not
useful as it led them to believe that those numbers would apply to their HELOC, when in fact
they represented just an example of how rates and payments had fluctuated in the past. A few
participants indicated that the table did not offer any new information not already described
in some form elsewhere in the disclosure, such as the variable rate nature of HELOCs. As a
result, the historical example table was removed from the disclosures and a statement about
the rate and payment fluctuations was instead tested in subsequent rounds, as discussed
below.

•

When reviewing the historical example table, some participants indicated that they found it
helpful to know how the index had behaved in the past, so that they could know how much it
had changed over time. Some participants found the range of the index useful in determining
the likelihood of the interest rate reaching its maximum. As a result, a statement was added to
the model forms under the heading Historical Changes in Interest Rate to indicate the range
of the value of the index over a 15-year historical period. The intent of this change was to
provide the most important information from the historical example table in a simple and
efficient way.

Description of Payment Plans
•

Beginning in Round 3, the early disclosures that were tested included information about two
payment plans. Over the following two rounds, multiple formats were tested explaining the
distinctions between plans and the relative advantages of each. Some described the plans in
narrative form, while others used a more structured tabular format. The final model early
disclosure uses a bulleted format to provide information on how payments are determined in

both the borrowing and repayment periods under both payment plans, and to allow
information about the two plans to be compared easily.
•

The final model early disclosure also includes a section labeled “Plan A vs. Plan B” that
directly compares the two plans in terms of their overall cost over time and the amount of a
balloon payment, if any, because some consumers were unable to determine from the sample
payment table (discussed below) which plan would be less costly over time.

Sample Payments
•

One aspect of the forms that varied throughout the testing was the hypothetical balance used
to calculate sample payments. Current Regulation Z requires that payment examples be based
on a $10,000 balance. However, Board staff learned through its outreach efforts and
confirmed through consumer testing that it is important for consumers to know what their
monthly payments would be under the “worst case scenario,” namely if they borrowed the
maximum amount under the credit line. The model forms tested in early rounds were based
on a $10,000 balance and a balance based on the maximum credit limit drawn. Some
consumers were able to multiply the payment amounts in the $10,000 example to determine
what their payments would be if they were to borrow $40,000 or $50,000 instead. However,
a number of consumers preferred a payment example based on the maximum credit limit,
indicating that they would like to know what would be the highest payment they would have
to make if they borrowed the entire credit limit.

•

Recognizing that consumers often borrow an initial amount when they first open their
HELOC and make additional draws during the borrowing period, another hypothetical
example was introduced in Round 5 based on the assumption that $10,000 was borrowed on
the first day of the borrowing period and an additional $10,000 borrowed on the last day of
the borrowing period. However, this confused participants, who indicated that they would
prefer a simpler hypothetical scenario. Some participants thought that they would be required
to take an additional $10,000 before the borrowing period expired based on this payment
example. Several participants were concerned that the payment table was telling them how
much they would have to borrow during the borrowing period, and were unsure whether they
could borrow more or less over time. As a result, the decision was made to show monthly
payments based on either a $10,000 balance or the entire credit limit drawn. Due to concerns
that payments based on a $10,000 balance might make the sample payments unrealistically
low for most consumers, especially if required minimum payments included only interest; as
well as outreach and consumer testing indicating a preference for payment examples based
on the full credit line; the final model forms use a hypothetical balance equal to the full credit
limit.

•

Because minimum required payments could potentially change over time as the principal is
paid down, most of the forms in early rounds of testing showed a range of payments. For
example, one form in Round 2 indicated that payments during the repayment period would
be “$200.00 decreasing to $34.12,” while another stated that the payment would be “up to
$200.00.” Given the two choices, participants strongly preferred the first phrasing, which was
used in several subsequent forms, but almost all participants were confused with the range of
payments and especially why payments would decrease over time. As a result, prior to

vii

Round 4, Board staff became concerned that providing the range of payments could result in
“information overload” for consumers, especially because a number of participants spent a
considerable time analyzing the range of payments at the expense of not focusing on other
pertinent information on the form. Subsequently, all forms used in Rounds 4 and 5—and the
final model forms to be released with the Board’s July 2009 proposal—listed only the first
payment in each period rather than the entire range. Based upon the assumptions used in
calculating the payment examples, the first payment in each period would be the highest
payment of each period.
•

The final model forms show payment examples for two different interest rates—the current
rate and the maximum rate under the plan. Forms used in Round 2 listed payments for four
different rates, rather than two. However, the decision was made that the marginal benefit of
showing two additional rates was small, compared to the risk of overwhelming consumers
with too many dollar figures.

Information about Risks
•

The final model forms include a section labeled “Risks,” which includes information about
the security interest, possible creditor actions such as account termination or suspension, and
tax deductibility of interest, as currently required by Regulation Z. Grouping this information
in a single section and labeling that section “Risks” made it more noticeable to participants
and easier for them to review the information quickly and efficiently.

•

Some versions of application and early disclosures that were tested displayed the “Risks”
section at the top of the form, and others at the bottom. In Round 1, a model account-opening
disclosure was tested with “Risks” on page 1 but at the very bottom of the page. Participants
were split regarding whether they preferred that information presented at the top of the form
or at the bottom. For some participants, the information was more noticeable if located at the
top of the disclosure, where it immediately caught their eye. Others did not pay much
attention to that information once they realized that it did not contain any specific terms and
rate that would apply to their HELOC. Those participants preferred to see “Risks” at the
bottom of the form, which enabled them to get to specific terms and features being offered at
the very beginning of the form. Regardless of the placement of the “Risks” section in the
table, most participants noticed and understood the disclosure about the risk of loss of the
home in case of default and the disclosure about a creditor’s right to terminate the plan in
certain circumstances. In the Board staff’s outreach, neither industry nor consumer group
representatives indicated a preference for either placement. Consumer advocates suggested
that for most consumers the placement of “Risks” at the bottom of the form would have as
much benefit as its placement at the top of the form, and emphasized the importance of
highlighting key terms, such as the APR. As a result of the testing and the outreach efforts,
the model early disclosure forms and the model account-opening form place “Risks” at the
bottom of the form.

viii

Findings Related to the HELOC Brochure and Key Questions
Document
•

Participants who were shown the HELOC brochure generally indicated that they found the
document useful and thought the information it contained was important—particularly for
consumers with little experience with home equity products. An almost universal criticism
among participants about the HELOC brochure was that it was too long. As a result, several
participants indicated they would be unlikely to read it. Several participants indicated that
they would be more likely to read a shorter and more concise disclosure.

•

Following Round 1, ICF Macro developed a one-page disclosure titled “Key Questions to
Ask About Home Equity Lines of Credit.” The goal was to summarize the most important
information in the HELOC brochure in a shorter, more consumer-friendly format. The Key
Questions disclosure tested extremely well with participants; all indicated that they would
find it useful, and most found it very clear and easy to read. As a result, the Board is
proposing to require lenders to provide the Key Questions document to prospective
borrowers instead of the HELOC brochure. While several different questions were tested in
different rounds, the questions listed and answered on the final proposed version are:

Can my interest rate increase?

Can my minimum payment increase?

When can I borrow money?

How soon do I have to pay off my balance?

Will I owe a balloon payment?

Do I have to pay any fees?

Should I get a home equity loan instead of a line of credit?

CHAPTER I: INTRODUCTION
BACKGROUND
In 1968, Congress enacted the Truth in Lending Act (TILA) to protect consumers by requiring
lenders to provide key pieces of information to consumers at various points in time. Congress
assigned the Federal Reserve Board (the “Board”) the responsibility of implementing TILA, and
the Board currently does so through Regulation Z.
In 2004, the Board began the process of reviewing Regulation Z to determine whether revisions
were necessary. In January 2009, the Board finalized amendments to Regulation Z rules
applicable to open-end (not home secured) credit (e.g., general purpose credit cards, merchantspecific credit plans, and overdraft lines of credit).3 The Board is currently in the process of
reviewing disclosures under Regulation Z related to home-secured open-end credit—namely,
home equity lines of credit, and closed-end mortgage disclosures. This report is related to the
Board’s review of disclosures for closed-end mortgage loans. One of the goals of this review is
to ensure that the amended regulations lead to improved disclosures that consumers would most
likely pay attention to, understand, and be able to use in their decision-making.
This report addresses to the Board’s review of disclosures related to HELOCs. One of the goals
of this review is to ensure that the regulations lead to disclosures that consumers would most
likely pay attention to, understand, and be able to use in their decision-making.
Under Regulation Z, HELOC borrowers must receive the following three types of disclosures, in
addition to others:
•

•

As of the writing of this report, the Board is in the process of revising these rules in light of legislation passed by
Congress in May 2009.

•

METHODOLOGY
Testing of the model forms was carried out through five rounds of interviews, as shown in Table
1. Before each round of interviews, ICF Macro developed model disclosures for testing. In most
cases, multiple versions of each type of disclosure were developed so that the impact of varying
language or format could be studied. The Board staff attended all rounds of testing. After each
round, ICF Macro briefed Board staff on key findings, as well as their implications for form
design and layout. These results were then used to create revised forms for use in the next round
of testing.
Table 1: Timeline of Cognitive Testing
Location

Dates

Number of Interviews

Round 1

Bethesda, MD

December 17-18, 2008

Round 2

Los Angeles, CA

February 11-12, 2009

Round 3

Chicago, IL

March 24-25, 2009

Round 4

Denver, CO

April 14-15, 2009

Round 5

Bethesda, MD

May 5-6, 2009

Participants in each of the four locations were recruited by telephone using a structured screening
instrument in order to ensure the selection of a range of participants in terms of gender, age, and
ethnicity. Most participants had HELOCs, while some considered getting a HELOC but opted
instead for a home equity loan. A few participants did not have a home equity loan or HELOC,
but had considered a HELOC in the past five years. Participants were screened out if they
worked for a bank or other financial institution, or if they worked in the real estate or mortgage
industry. The screening criteria that were used were essentially the same in each location,
although the recruiting quotas changed slightly in each round to provide for a diverse and
representative participant pool. A sample recruitment screening instrument is included as
Appendix A, and a summary of participants’ background and demographic information can be
found in Appendix B.
Interviews in each location were approximately 90 minutes long. While the interview guide
varied between rounds, the general structure of these interviews was very similar. Participants
were given a disclosure form and asked to “think aloud” while they went through the document,
indicating whenever they found something surprising, interesting, or confusing. Following this
“think aloud” process, each respondent was asked specific questions about the information on the
disclosure to determine how well he or she could find and interpret the content. The participant
would then be given another disclosure form—either a new version of the same disclosure type,
or a new type altogether—and the interviewer would take them through the same process.
Variations in the interview protocol, as well as a description of the forms that were shown to
participants, is provided in the description of each round of findings in Chapter III.

CHAPTER II: GUIDING PRINCIPLES FOR DISCLOSURE DESIGN
Much of ICF Macro’s design of revised disclosures was based directly on findings from
cognitive testing. This reliance on direct consumer research is an important strategy for ensuring
that disclosure forms are useful and understandable to their intended audiences. At the same
time, there are a number of general principles to which ICF Macro’s designers try to adhere
whenever engaged in this or similar projects. These principals include:
•

Use plain language. Jargon and technical language should be avoided whenever possible,
and replaced with words that are more easily understood by consumers. The use of simple
language is particularly important in the context of disclosures, because consumers at the
greatest risk of being taken advantage of are often those with lower literacy levels. While
readability metrics (such as the “grade level” of the writing) can be useful in this respect, the
best way to determine whether language is truly understandable is through direct consumer
testing.

•

Prioritize information, and structure disclosures so that the most important
information for consumers is easiest for them to find. Consumers frequently do not read
disclosures carefully; those who do look at them often skim them quickly to look for a few
key pieces of information. If consumers cannot quickly find the information they are looking
for, they are likely to become frustrated and give up. Therefore, before any design work can
begin there must be some discussion to identify the most important pieces of information on
the form. Those should be located most prominently on the disclosure, to increase the
likelihood that even consumers who skim the form quickly can find and understand that
information.

•

Provide information in a format that makes it easy to compare terms between
disclosures. One purpose of HELOC disclosures—particularly early disclosures—is to serve
as a tool to help consumers compare products from different lenders. Narrative text is often
difficult to compare in this way, because consumers cannot always identify the equivalent
information between forms. Providing information in more structured formats, such as tables
with consistent labels and headings, facilitates this kind of shopping comparison.

•

Keep language and design elements consistent between forms so that information can
be tracked over time. In a disclosure regime like that currently in place for HELOCs,
consumers get information about the product for which they are applying at multiple points
in time. One goal of these disclosures is to help consumers track the terms of their line of
credit at each stage in the process (from application to closing, for example) to make sure
nothing changes without their knowledge. To facilitate this, the structure and formatting of
disclosure elements, as well as the language that is used to describe various aspects of the
product, should be made consistent between disclosures whenever possible.

•

Use headings and titles to make documents more navigable, and to help consumers find
the information they are looking for. When large amounts of text are included, plain
language headings should be used to distinguish sections on different topics. In tables, rows
and columns should have short, easy-to-read titles that accurately describe the information
that is provided. This allows consumers to find information that they are looking for quickly
and efficiently, and decreases the likelihood that they will become distracted by unrelated
text.

•

Group related concepts and figures. HELOC disclosures contain a great deal of disparate
information about a complex financial product. Consumers are likely to find it easier to
absorb and make sense of the information if it is grouped in a logical way so they do not have
to constantly shift their mindset as they read. For example, the revised HELOC disclosures
groups several pieces of information about potential risks into the same section of the form,
whereas in most disclosures that are currently in use these references appear in multiple
places.

•

Build off of prior research whenever possible. While each type of disclosure is different,
findings from cognitive testing can often translate between different documents. The
applicability of a disclosure format in a new context should always be confirmed through
cognitive testing, but it often provides a useful starting point. For example, the tabular
structure of revised early and account-opening forms—as well as some of the wording of
information related to APRs—was originally developed in a project ICF Macro conducted
for the Board related to credit card disclosures.

CHAPTER III: TESTING OF REVISED DISCLOSURE FORMS
INTERVIEWS IN BETHESDA, MARYLAND (DECEMBER 17-18, 2008)
Objectives and Methodology
The first round of 10 cognitive interviews was conducted in Bethesda, Maryland on
December 17 and 18, 2008. The primary focus of this round was to test consumer
comprehension of two different formats for a home equity line of credit disclosure form—a textbased form similar to those currently in use, and a form using less text and a more structured
tabular framework.
Four forms were tested in Bethesda:
•

An application disclosure in primarily narrative form, designed to be representative of
disclosure documents currently in use;

•

A new account-opening disclosure in tabular form, developed by ICF Macro to present more
specific information about HELOC terms being offered;

•

A page providing information about sample payments, titled “Payment Examples”; and

•

The Federal Reserve Board brochure “What You Should Know About Home Equity Lines of
Credit” (referred to in this report as the “HELOC brochure”).

The first three forms can be found in Appendix C to this report. The HELOC brochure can be
found at http://www.federalreserve.gov/Pubs/equity/homeequity.pdf.
The interview protocol included the following sections:
•

Interview participants were asked to review the application disclosure that is very similar to
forms currently in use, and a new account-opening disclosure developed by ICF Macro. They
were shown these two forms in a rotating order, to minimize learning effects. After reviewing
each disclosure, participants were asked a series of questions designed to test their
comprehension of the content.

•

Next, participants were shown a page containing information about sample payments. The
goal of this section of the interview was to understand what participants understood about the
page, as well as to gather data on what type of payment information would be most useful to
them.

•

Finally, participants were presented with the Federal Reserve Board brochure “What You
Should Know About Home Equity Lines of Credit” (the “HELOC brochure”) and asked to
assess its usefulness and clarity.

Key Interview Findings
Previous Experience with HELOCs
•

Nine of the 10 participants had obtained HELOCs in the past, while one had opted for a
home equity loan because he found that interest rates were lower on that product.

•

Of the 9 who had HELOCs, only 1 participant had considered getting a home equity loan
instead. Others indicated that they had not, because they did not know how much money they
were going to need when they opened their line of credit. A number of participants, however,
were unclear about the difference between a HELOC and home equity loan until the
distinction was explained to them. Some of these participants did not fully understand
whether they had a home equity loan or a HELOC. Only one participant had ever heard the
acronym “HELOC” prior to being recruited for this project.

•

Almost all participants said that their HELOCs were originated either by their original
mortgage provider, a prior lender, or through a bank with which they had an existing banking
relationship. Only one participant indicated that he actively shopped among lenders for a
HELOC; he eventually decided against getting a HELOC because the fees were too high.

•

Few of the participants indicated that they had conducted research on HELOCs before
applying for one. Among those who did, most said that they gathered information by talking
to family and friends, or by talking to their primary mortgage lender.

•

When participants were asked what advice they would give to a friend or family member
who was interested in getting a HELOC, the most common response was to use a lender that
was trustworthy. Only one participant mentioned shopping among lenders when asked this
question.

Application Disclosure
Initial Reactions

•

On Day 1, when the application disclosure form was the first form reviewed, all
5 participants were extremely confused by the form.

•

All 10 participants had difficulty reading the application disclosure form, and most did not
read all the way to the end.

•

On Day 2, when the application disclosure was the second form reviewed, participants were
slightly less confused by the form because they had seen the tabular format of the accountopening form first, and therefore had some idea about what type of information the
application disclosure form was attempting to convey.

•

Despite the fact that participants on Day 2 saw the tabular account-opening form prior to
seeing the application disclosure form, all 5 of them still had difficulty understanding the
application disclosure.

•

Two of the participants said that they would not read such a document if it was given to
them, because it was so difficult to read.

•

When asked to compare the text-based application disclosure with the tabular accountopening disclosure, 8 of the 10 respondents said that they preferred the tabular format
because the tables made it easier to find information. The remaining two participants stated
that they prefer the textual format of the application disclosure because it appeared to provide
more information.

Information about Interest Rates

•

Most of the participants appeared to have a general understanding of what the term “index”
meant. Most were also able to identify the Prime Rate as the index for the loan being
described in the form.

•

Two participants were confused by the statement that the interest rate would be based on the
Prime Rate “as published in the Wall Street Journal.” One commented that he did not know
why this would be relevant to him, while the other mistakenly thought this meant he would
have to subscribe to the Wall Street Journal in order to know what his interest rate was.

•

Fewer participants understood the term “margin” as it was used in the form. About half
generally understood that it was an additional percentage that would be added to the index by
the lender.

•

Most participants understood that the rate was variable. Most got this information from the
text of the disclosure, while one got it from the Historical Example table at the end of the
form.

•

All but one of the participants correctly identified the maximum rate as 24.99%. However,
most of them felt that it was very unlikely the rate would ever get this high.

Fees

•

Everyone understood that fees would be charged, and that they would total between $0 and
$1,000 (the amounts shown on the form).

Draw and Repayment Periods

•

When reading the application form, participants were very confused by the distinction
between a “draw period” and a “repayment period.” Almost none of them could explain what
a “draw period” was; no one had heard of this term before.

•

Because they had not been exposed to this concept previously, participants had a great deal
of difficulty understanding the timing of the draw and repayment periods. Some assumed that
the draw and repayment periods ran concurrently, while others indicated that the repayment
period began when one first withdrew money from the account. Even after considerable
review and questioning from the interviewer, only a few participants eventually understood
that the repayment period began when the draw period ended.

•

Several of the participants confused the repayment period with the option to extend the draw
period.

Balloon Payment

•

After their review of the application disclosure, most participants understood that they could
owe a balloon payment. However, three participants could not explain what a balloon
payment was, or in what situation they would owe one.

Information about Potential Risks

•

All participants understood that they could lose their home if they did not meet their loan
obligations. This understanding was based on prior knowledge, however, rather than on the
“Security Interest” statement they read on the form. In fact, several skipped the “Security
Interest” statement when reading the disclosure.

•

One participant suggested that this section of the form be given a clearer title, such as “Risk
of Home Loss.” This, he felt, would increase the likelihood that potential borrowers would
pay attention to it.

Historical Example Table

•

Many participants understood that the purpose of the historical payment example was to
provide information to the consumer about how interest rates could change over time.
However, several did not realize that the information in the table was based upon actual
historical rates. These participants instead thought that the table provided a hypothetical
example of what could happen in the future—despite the fact that the table referred to the
years 1991 to 2005. Some participants concluded that the information in the table represented
what their monthly payments would be if they were to open a HELOC account.

•

Almost all participants understood that their payment would be lower when the rate was
lower. However, based on responses to other questions it is likely that participants
understood this fact even before reading the form.

•

None of the participants on Day 1 understood that the reason payments were higher during
the repayment period than during the draw period was because the payment calculation
method changed (i.e., payments during the draw period included interest only whereas
payments during the repayment period included principal and interest). Comprehension was
higher on Day 2, because of learning effects from the account-opening disclosure that was
shown first on Day 2.

Account-Opening Disclosure
Initial Reactions

•

Participants on Day 1 felt very positively about this form, since most had struggled to
understand the application disclosure. Several commented that they found the accountopening disclosure much easier to read and understand.

•

One participant commented that he liked having the credit limit and interest rate information
in bold, large print so that it stands out from the rest of the text.

Information about Interest Rates

•

All participants were able to identify the initial APR easily. Everyone also understood that
the interest rate would change, and that it would change depending on the Prime Rate.

•

Almost all participants understood that the maximum rate was 24.99%. One mistakenly
thought that 24.99% represented the highest the Prime Rate could go, and assumed that the
maximum rate for the HELOC would be 26.99% (i.e., 24.99% plus 2% margin).

•

Most participants understood the meaning of the sentence, “The APR on a HELOC does not
include costs other than interest.” However, a few misinterpreted this information; for
example, one participant thought this statement was indicating that he would be charged no
fees for opening a line of credit. Even those who did understand what the statement meant
could not indicate why this information would be on the form, or how they would use this
information. Participants did not understand that the purpose of this statement was to make
clear to participants that APRs on these products cannot be directly compared to those of
closed-end loans, which do include fees.

Fees

•

Almost all participants understood that there would be fees associated with opening a
HELOC, and could also identify the amount of the fees.

•

One participant suggested that the fees should be called “closing costs” rather than “account
opening costs,” because that term was more familiar to her.

•

All participants understood that if they closed the account before the end of the first three
years, an early termination fee would apply.

Draw and Repayment Periods

•

As with the application disclosure form, there was considerable confusion about the timing of
the draw period and the repayment period. Several individuals mistakenly thought that the
two periods occurred concurrently.

•

One participant mistakenly thought that no money would need to be repaid during the draw
period, and that all payments would take place during the repayment period.

•

One participant suggested that information about the draw and repayment periods be
provided in a chart, to make it easier to see the differences between them. Another
recommended including a timeline on the form to explain the timing of the two periods.

Balloon Payment

•

Most participants understood that they would owe a balloon payment, just as they did when
looking at the application disclosure. However, participants’ comprehension of the concept
of a balloon payment seemed to be higher when they were looking at the account-opening
disclosure.

Information about Potential Risks

•

All participants also understood that the bank had the right to terminate the loan early, but
several objected to this and said they would “not be interested” in a loan that carried that
condition. Almost none of the participants had noticed this information in the application
disclosure.

Minimum Loan Amount

•

While most participants understood intuitively that the “minimum draw” referred to the
smallest amount that could be taken out at a given time, one woman initially interpreted this
to mean that this was the minimum draw per month, rather than per transaction.

Review of Payment Example
Initial Reactions

•

Several participants looked immediately at the chart, without first reading the explanatory
text at the top. “There is so much written at the top that you feel like you want to jump down
to here [tables],” said one man.

•

Only a few of the participants realized that the minimum payments during the draw period
included interest only and no principal.

•

Several participants were confused by the numbers of payments that were provided on the
page. For example, about half struggled to understand why the 20-year repayment period was
listed as “239 payments” (with the last payment shown as a separate balloon payment), while
others were unable to calculate the term of the HELOC from the number of payments.

•

One participant commented that the tables were trying to convey too many variables at once
(i.e., the impact on payments of varying interest rates, draw vs. repayment period, and size of
balance). He suggested that payment examples could be better provided through an
interactive website.

Understanding of Payment Information

•

All participants understood the difference between the two columns of payments shown—
that is, that the payment would vary based on the interest rate.

•

Those participants who skipped directly to the table without reading the explanatory text first
were completely confused as to why the payments listed for the draw and repayment periods

had such different payment amounts. Once they were directed to read the text, many
eventually understood that the difference in payments was due to the fact that the payments
during the draw period were interest-only, although some understood this only with great
difficulty.
•

None of the participants understood why a range of payments was listed for the repayment
period in the first column. This was intended to show the fact that payments would decrease
over time as the principal was paid off, but no participants could ascertain this from the form.
Most participants incorrectly assumed that the range of payments reflected a fluctuation in
interest rates over that time period. Many participants also commented that the range should
be listed from lowest to highest.

•

When asked what their minimum monthly payment would be for a $30,000 balance, almost
all participants were able to multiply by three the amounts shown for a $10,000 balance,
while one divided by two the amounts shown in the $80,000 table and then assumed the
payment on $30,000 would be “a little less.” At least one participant did not have any idea
how to estimate what the payments would be on $30,000 since the table showed payments
based on a $10,000 balance and an $80,000 balance.

Balloon Payment

•

Participants were much more likely to understand from this form that a balloon payment
would be owed at the end of the repayment period than they were after reading the
application disclosure. However, this was likely due, at least in part, to learning effects, since
all participants saw the application disclosure before the Payment Examples page.

•

Several participants expressed surprise that they might owe thousands of dollars at the end of
the repayment period, even if they made minimum payments throughout.

Review of HELOC Brochure
•

None of the participants remembered having ever seen the HELOC brochure before, even
those who had previously opened HELOCs.

•

The reaction to the brochure was generally favorable. One participant said that it was a “good
first step” to providing the information that consumers needed. Several said that the brochure
would be particularly useful for people who were considering opening their first HELOC.
One participant, however, called the document “dry and boring.”

•

Several participants commented that while the content of the HELOC brochure was useful,
they probably would not read it if they received it from a lender. The two most common
reasons given were that the document was too long and would take too much time to read,
and that they felt they already knew whatever they needed about the product. The sentiment
about the HELOC brochure being too long was shared even by many participants who
otherwise viewed the brochure very favorably.

•

Most participants said that the glossary was particularly useful to them—especially the
definitions of those terms, like index and margin, which they had struggled to understand on
the disclosure forms they were shown. Several participants were specifically looking for
definitions of draw and repayment periods, and, when they were unable to find them,
commented that the glossary should define these two terms since they are not intuitive.

•

The “shopping worksheet” in the brochure received mixed responses. Some said that the
worksheet would be useful and that they would definitely use it, while others said they
probably would not. Participants’ enthusiasm for the worksheet was generally dampened by
the fact that few seemed to believe it was important to shop between different lenders.

Subsequent Design Decisions
General Structure of the Application Disclosure
•

Participants had a great deal of difficulty comprehending the application disclosure, largely
because the document was so text-heavy. Participants also expressed a preference for a
tabular format, such as was used in the account-opening disclosure. In addition, the use of a
tabular format seemed to improve participants’ understanding of several aspects of the forms,
such as the balloon payment. For these reasons, the decision was made to develop a tabular
application disclosure to be tested in the next round of interviews as an alternative to the
current text-based version.

Information about Interest Rates
•

All participants were unsure how to use the statement that “The APR on a HELOC does not
include costs other than interest.” Since this statement is currently required by Regulation Z
and the statute, a decision was made to test it with more context in the next round to provide
a framework that would increase consumer comprehension.

Draw and Repayment Periods
•

Because several participants had difficulty understanding the distinction between the draw
and repayment periods, these periods were renamed in forms for the next round. The
“repayment period” was renamed the “payoff period” and two new labels for the “draw
period” were tested in the next round: “withdrawal period” and “borrowing period.”

•

When looking at the Payment Examples page, participants had a great deal of trouble
distinguishing the draw and repayment periods. One of the primary goals of the forms
developed for the next round was to better describe how these two periods are distinct, and
the impact of each on the required monthly payments.

•

Several participants did not understand from reading the forms that the draw and repayment
periods were consecutive, rather than concurrent. Forms for the next round highlighted the
start and end dates of these two periods to emphasize the fact that they are distinct and do not
overlap.

•

Because the word “draw” was not intuitively understood by participants (i.e., as in
“Minimum Draw”), this word was replaced with “loan.”

Information about Payments
•

Because it was not clear that participants needed to be shown payment examples for two
different balances, and because almost all participants were able to estimate payments for
different balances from sample payments on $10,000, forms for the next round only provided
sample payments for a single hypothetical balance of $10,000.

•

Almost all participants were confused by the fact that the payment during the repayment
period was listed as a range. Two different ways of addressing this issue were tested in the
next round. Some forms indicated that the payment was decreasing over time (e.g., “$100.00
decreasing to $30.48”). Other forms simply said that the payment during that period would
be “up to $100.00.”

•

Several participants had difficulty interpreting the numbers of payments provided in the
Payment Examples page. For example, they were not able to easily add up the number of
payments to calculate the term of the HELOC. Because it was unclear that this information
would be useful to consumers, the number of payments was not included on subsequent
forms.

•

In order to provide participants with more information about how their payment might vary
based on changes in their interest rate, the forms used in the next round of testing showed
sample payments for four different interest rates (including the minimum and maximum rates
under the plan), rather than two.

Information about Potential Risks
•

To make it easier to read for consumers, most of the information provided in the “Other
Important Information” section of the account-opening disclosure was restructured into a
section labeled “Risks.” This section was also included in the tabular version of the
application disclosure that was tested in the next round.

•

Because some participants had difficulty understanding the section of text labeled “Our Right
to Terminate or Reduce Your Line of Credit,” the information in this section was bulleted in
all subsequent forms.

Historical Example Table
•

A significant number of participants in this round had difficulty understanding the Historical
Example table. For example, several did not even understand that this table was providing
historical information about rates. Because of this confusion, some of the forms tested in the
next round did not include this table.

HELOC Brochure
•

Because several of the participants in this round commented that they might not read the
HELOC brochure because of its length, the decision was made to develop a new, shorter
early disclosure highlighting important features of HELOCs. This new disclosure was tested
in the following round of interviews.

INTERVIEWS IN LOS ANGELES, CA (FEBRUARY 11-12, 2009)
Objectives and Methodology
The second round of 10 cognitive interviews was conducted in Los Angeles, California on
February 11 and 12, 2009. The primary focus of this round was to test consumer comprehension
of an array of home equity line of credit disclosure forms. The goal was to supplement first
round findings in regards to basic formatting and to experiment with different approaches to
disclosing more complex features of HELOCs, such as payment examples and the difference
between draw and repayment periods. This round also included the testing of a new one-page
early disclosure form about HELOCs.
Eight forms were tested in Los Angeles, all of which are provided in Appendix C:
•

An application disclosure form similar to that used in the first round of testing, designed to
be representative of disclosure documents currently in use (AD-1);

•

Two application disclosure forms that included similar information to AD-1, but in a new
tabular format (AD-2A and AD-2B); 4

•

Two other application disclosure forms similar to Forms 2A and 2B except that several
statutorily required requirements were relaxed (AD-3A and AD-3B);

•

Account-opening forms in two different formats (AO-A and AO-B); and

•

A new disclosure titled “6 Key Questions to Ask About Home Equity Lines of Credit,” that
was designed to be provided to consumers with an application.

The interview protocol included the following sections:
•

Each interview participant was asked to review AD-1 and one of the two AD-2 forms. They
were shown these two forms in a rotating order, to minimize learning effects. The goal of this
portion of the interview was to assess whether the new tabular format improved participants’
comprehension of this information.

The format of the “A” and “B” versions of AD-2 and AD-3 paralleled the two different account-opening forms that
were shown to participants.

•

Next, participants were shown one of the AD-3 forms. The differences between AD-2 and
AD-3 were pointed out to participants, who were asked to compare each aspect of the two
forms in terms of their usefulness.

•

Participants were then shown both Forms AO-A and AO-B. In addition to answering
questions testing their comprehension of the information, participants were also asked to
comment on the differences in format between the two forms.

•

Finally, participants were presented with a new one-page early disclosure titled “6 Key
Questions to Ask About Home Equity Lines of Credit” (the “Key Questions” disclosure).
After being shown this new disclosure, participants were asked questions to test their
understanding of the content and solicit feedback on the document’s usefulness.

Key Interview Findings
Previous Experience with HELOCs
•

During the initial portion of the interview, it was clear that several participants did not
understand the difference between a home equity loan and a HELOC. For example, one
person initially indicated that she had a home equity loan, but after the difference was
explained to her she realized that she actually had a HELOC.

•

Of the eight participants who had previously obtained a HELOC, only one had talked to
several lenders before opening the line of credit. The rest either used the same lender who
had financed their first mortgage, or a lender with whom they had a prior business
relationship. The one participant who had shopped for a HELOC chose the lender who
offered the lowest interest rate.

•

Of the eight participants who had obtained HELOCs, none had considered instead getting a
closed-end home equity loan. Most indicated that a closed-end loan would not have been
appropriate for them, because they did not know in advance how much money they were
going to need to access. Two participants who had used “piggy-back” HELOCs to purchase a
house indicated that they had not been given a choice by their lenders whether to instead get
a second mortgage.

Application Disclosures (AD-1 and AD-2)
Information about Interest Rates

•

Four of the 10 participants incorrectly thought that AD-1 identified a specific interest rate for
their line of credit. 5 Two thought that their interest rate would be 24.99%, the maximum rate
listed. Two others thought that their rate would be 8.5% because this figure was used in the
minimum payment example shown on the form. When reviewing AD-2, however, all

5
Because AD-1 was an application disclosure that would have been provided before any underwriting had taken
place, the disclosure did not indicate what the interest rate would be, consistent with the current Regulation Z
requirements.

10 participants were able to correctly identify the range of interest rates they might be offered
if they applied.
•

Only three of the 10 participants understood after reading AD-1 that their interest rate would
be determined based on an index plus a margin. When asked to find this information on the
form, most participants were unsure in which section of text to look.

•

All but one of the participants understood from AD-2 that the interest rate would be
determined by the Prime Rate plus a margin. All but one also understood that the size of the
margin would be determined by their creditworthiness.

•

Eight of the 10 participants understood that the loan described in AD-1 had a variable interest
rate. All 10 participants understood from form AD-2 that the interest rate would be variable.

•

Six of the 10 participants were able to find the maximum interest rate on AD-1 without
assistance from the interviewer, compared to eight of 10 who were looking at AD-2.

•

AD-2 included a statement that the APR “does not include fees other than interest (unlike the
APRs for traditional mortgages and home equity loans, which include some closing costs).”
Most participants generally understood that this statement meant that the APR represented
the costs associated with interest. However, none understood the text in parentheses relating
to the APRs for closed-end products. None were also able to articulate why this statement
might be on the form or how the information might be useful to them.

Information about Payments

•

All participants were able to identify the initial monthly payment for a balance of $10,000
and an interest rate of 6.0%, regardless of whether they were looking at AD-1 or AD-2. All
answered the question either by looking at the Historical Example or Minimum Monthly
Payment tables.

Fees

•

All 10 participants understood that they would have to pay fees to take out a line of credit,
and could identify what the amount of the fees might be. Both AD-1 and AD-2 appeared to
provide this information equally clearly.

•

A few participants commented that they would like a more detailed breakdown of accountopening fees at the application stage, rather than an aggregate amount.

Withdrawal/Borrowing and Payoff Periods

•

Of the five participants who saw AD-1 first, only two understood that they would have
10 years to borrow from their line of credit and an additional 10 years to pay it off. One
participant knew that each period was 10 years long, but thought that they might run
concurrently.

•

Of the five participants who saw AD-2 first, again only two understood the exact timing of
the withdrawal/borrowing and payoff periods. One did not see any reference to the payoff
period, while another mistakenly thought that the line would have to be paid off before the
payoff period began.

•

When looking at AD-2, several participants had difficulty determining how long the two
periods were because they were shown as ranges of years (e.g., 2009-2018) as opposed to a
time frame (e.g., 10 years).

•

Few participants understood that the minimum payments during the withdrawal/borrowing
period would cover only interest and no principal. Only one of five participants who saw
AD-1 first understood this fact, as did two of five who saw AD-2 first.

•

With both AD-1 and AD-2, seven of the 10 participants understood that they would not be
able to withdraw funds during the payoff period. Neither form appeared to be noticeably
more effective at communicating this information.

•

Only three of the 10 participants understood that a range of minimum payments was shown
during the payoff period because the payment would change as the principal was paid off.
Most incorrectly thought that the reason a range of payments was provided was that the
payment might vary based on changes in interest rates.

Balloon Payment

•

Most participants understood what a balloon payment was, and why it would be due at the
end of the HELOC term. Participants’ comprehension of balloon payment did not seem to
depend on whether they were looking at AD-1 or AD-2.

•

Only a few participants realized that the loan described in AD-1 could have a balloon
payment at the end. When reading AD-2, however, most understood that there could be a
balloon payment.

Information about Potential Risks 6

•

Three of the five participants who were shown AD-1 first understood that they could lose
their home if they did not make the minimum payments, compared to four of the five who
were shown AD-2 first.

•

Seven participants understood from form AD-1 that the bank had the right to terminate the
line of credit early. Comprehension of AD-2 appeared to be slightly better; all participants
but one could identify this information on this form.

AD-2 and AD-3 provided information about potential risks in a separate section labeled “Risks.” In AD-1, this
information was provided in various places throughout the text.

•

Several participants commented that they would want to know the specific circumstances
under which the bank could end their line of credit. One participant suggested that the text be
made even clearer; she suggested rephrasing the sentence as, “The bank can call in your
loan.”

Historical Example Table

•

When asked to explain in their own words what the Historical Example Table showed, most
participants said that it reiterated to them that the rate could change, and that if the rate
changed their payment would change. However, as in the previous round several participants
did not understand that the information in the Historical Example table was based on actual
historical information; they assumed that the figures shown were hypothetical.

•

When reviewing the Historical Example Table, a few participants commented that they found
it useful to know how much the Prime Rate varied over time. One reason they felt this
information was important was because it helped them assess the likelihood that the interest
rate would reach its maximum.

•

When asked how they would use the information in the Historical Example Table when
evaluating a HELOC, several said they would not. Most others were unable to explain
exactly how they would use the information, or why it would be useful to them.

Minimum Loan Amount

•

Almost all participants could identify the minimum loan amount for this line of credit,
regardless of whether they were shown AD-1 or AD-2.

Comparison of AD-2 and AD-3
•

Forms AD-2 and AD-3 used different phrasing to indicate that the payments during the
repayment period would vary over time, due to the fact that the principal was being paid off.
For example, AD-2 stated that at an interest rate of 6%, minimum payments during the
payoff period would be “$200.00 decreasing to $34.12,” while AD-3 indicated that the
payments would be “up to $200.00.” Six of the 10 participants indicated that they preferred
the former wording because it was more precise; two went so far as to call the “up to”
language “suspicious.” One said that she liked the latter wording because she did not
understand what “decreasing to” meant, while the other participants did not have a
preference. It should be noted, however, that understanding of this range of payments was
very low regardless of how it was phrased (see above).

•

The first page of the AD-2 forms listed information about risks first, and terms of the line of
credit (i.e., credit limit, APR, etc.) below. This order was reversed on the AD-3 forms. Seven
of the 10 participants preferred having the risk information at the top; one thought it was
“good information to lead with,” while another said that it “makes you more cautious.” Three
participants preferring having information about the credit limit and APR above the risks.
One thought this was a more logical order for the information, while another described it as
getting “the sweet before the sour.”

Comparison of AO-A and AO-B
•

AO-A used the term “borrowing period” to describe the initial period of time when money
could be borrowed, while AO-B used the phrase “withdrawal period.” Participants
overwhelmingly preferred the term “borrowing period,” because they felt it more accurately
described how a line of credit worked.

•

Forms AO-A and AO-B described the APR in two different ways. AO-A explained that the
rate would be equal to the “Prime Rate + 2%,” while AO-B merely said that the interest rate
would “vary with the market monthly based on the Prime Rate.” Seven of the 10 participants
indicated that they preferred the wording used in AO-A, because it was more precise and
gave more information. The remaining three participants did not express a preference
between the two versions.

•

In the section of the account-opening disclosure that described the borrowing and payoff
periods and provided sample minimum payments, AO-A provided information about the two
periods first, with payment information below. AO-B first provided a table of sample
payments, and below the table explained the differences between the two periods. Five of the
participants preferred the order of information in AO-A because they felt the description of
the two periods helped them interpret the numbers below. Two participants preferred the
format of AO-B because it seemed more logical to them to start with the numbers and then
provide the explanation. The remaining participants did not have a strong preference between
the two formats.

•

AO-A included estimated balloon payments in a separate column in the Minimum Monthly
Payments table, while AO-B stated only that the balloon payment could be “up to” a certain
amount. About half of the participants preferred to see the column of balloon payments (the
format used in AO-A), while none preferred the AO-B format. The other half of participants
had no preference, in some cases because they did not understand what was meant by a
“balloon payment” in either format.

•

AO-A provided minimum monthly payment examples for a balance of $10,000, while AO-B
provided examples for a balance of $50,000. Participants were split as to which they
preferred; four said that they would prefer to receive examples based on a $10,000 balance
because it would be easy to use these figures to estimate a payment for a larger balance,
while three thought payments on a balance of $50,000 would be more realistic for
consumers. One participant suggested that payment examples should be based on an
assumption that the full credit limit has been accessed, so that borrowers would see the
“worst case scenario.”

•

While participants were split in terms of their preference, payments based on $10,000
appeared to be more useful for them. All five participants who were asked were able to
accurately estimate what their payments would be for a $50,000 balance by multiplying the
payments in AO-A by five. However, only two of five were able to divide the payments
shown in AO-B by five to estimate what their payments would be on $10,000.

Key Questions Disclosure
•

The one-page Key Questions disclosure was rated very highly by all participants. All said
that they would find the form useful. Several commented that it was easy-to-read, and that it
asked and answered important questions.

•

Participants generally understood the content of the disclosure and could explain to the
interviewer what each of the questions and answers meant.

•

In several cases, the Key Questions disclosure helped clarify concepts with which
participants had previously struggled. For example, one participant who had not understood
balloon payments on the previous documents said that she found the explanation on this form
clear on the Key Questions document. Another participant indicated that the explanation of
borrowing and withdrawal periods helped her to understand that concept, which she had
found confusing while reading the other documents.

•

One participant commented that “everyone knows they will have to pay fees” to borrow
money, and therefore recommended that this question be replaced with another that would be
more informative to consumers.

Subsequent Design Decisions
Information about Interest Rates
•

Participants continued to be confused by the text indicating that, unlike the APRs for
traditional mortgages and home equity loans, the APR for a HELOC does not include fees
other than interest. Therefore, in forms for the next round this text was separated into its own
row labeled “Comparing APRs” to try to indicate to consumers how they could use this
information.

Withdrawal/Borrowing and Payoff Periods
•

Because most participants strongly preferred the term “borrowing period” to “withdrawal
period,” this phrase was used in all subsequent forms.

•

The use of the term “payoff period” instead of “repayment period” did not have any
noticeable effect on participants’ understanding of this concept. In addition, following this
round Board staff became concerned that the term “payoff period” could imply to consumers
that the balance would be paid off over time—when in fact paying off the line of credit might
require a sizable balloon payment. Therefore, all subsequent forms used the original term,
“repayment period.”

•

In order to conserve space on the form, the format in which the differences between the two
periods were described was significantly revised for the next round. Rather than providing
this information in a table on the second page, the distinctions between the borrowing and
repayment periods were illustrated in a section on the first page titled “Borrowing and
Repayment Terms.”

•

Participants in this round continued to have difficulty understanding the timing of the two
loan periods. To address this problem, forms for the next round indicated a section on the
first page labeled “Duration of Line of Credit” that indicated the overall term of the HELOC,
as well as the timing of the borrowing (“Years 1 to 10”) and repayment (“Years 11 to 20”)
periods.

Information about Payments
•

Because of concerns that using a $10,000 hypothetical balance to calculate sample payments
may lead to misleadingly low payment amounts, the account-opening disclosure tested in the
next round showed payments for both $10,000 and $80,000 balances (based on an $80,000
credit limit).

•

Because most participants preferred the phrasing of AD-2 (“$200.00 decreasing to $34.12) to
that of AD-3 (“up to $200.00”) as a description of payments during the repayment period,
forms for the next round used this wording.

•

To emphasize the difference in how payments are calculated in the borrowing and repayment
periods (particularly the fact that the borrowing period payments are interest-only), a short
description of the calculation methods was added to the title of the columns in the Sample
Payments table.

•

Because it was unclear that providing sample payments for four different interest rates
increased the usefulness of the disclosure, and because of concerns that the number of dollar
figures being shown on the form was confusing participants, all subsequent forms showed
sample payments for only two rates—the current APR and the maximum APR under the
plan.

•

Because participants’ awareness of the presence of a balloon payment was greater when this
payment was included as a column in the sample payment table (as in AO-A), this format
was used in forms for the next round.

Historical Example Table
•

As in the previous round, several participants continued to have difficulty understanding the
Historical Example Table. Because of this, and because some participants indicated that they
would not use the information it provided, this table was removed from forms for the next
round of testing, and tested as a separate stand-alone document so that more detailed
information could be collected about what participants take away from the table, and how
useful they find the information.

•

Although participants continued to have difficulty understanding the Historical Example
table, one piece of information that some participants did find useful was the extent to which
the index had varied over the past 15 years. Therefore, in the next round this information was
highlighted on the first page of all disclosures, under the heading “Historical Changes to
Prime Rate.” This new section also included an estimate of how much their payment would
have varied over that same time period.

Key Questions Disclosure
•

Because participants responded so positively to the Key Questions disclosure, this form was
revised and tested again in subsequent rounds.

INTERVIEWS IN CHICAGO, ILLINOIS (MARCH 24-25, 2009)
Objectives and Methodology
The third round of 10 cognitive interviews was conducted in Chicago, Illinois on March 24th and
25th, 2009. As in previous rounds, the goal of this round of testing was to assess participants’
understanding of revised disclosure forms, and to ask participants to compare different variations
and indicate which they found clearer.
Prior to the Chicago round of interviews, Board staff had some concerns about the usefulness of
the application disclosures for participants. ICF Macro’s testing of closed-end mortgage
disclosures 7 conducted during the same time period had shown that participants strongly disliked
a disclosure form that lacked specific terms and features because such general information was
not useful to them. Participants in closed-end testing were shown an initial adjustable-rate
mortgage (“ARM”) program disclosure which, like the HELOC application disclosure, is
provided with the application and does not provide transaction-specific information.
Overwhelmingly, participants indicated that because of its lack of specificity, they would not
find the initial ARM program disclosure useful and would be unlikely to read it. While
participants in HELOC testing were not as vocal in their dislike of the application disclosure,
some of the same sentiment was apparent.
To address this issue, Board staff decided to test a new type of disclosure: an “early disclosure”
of transaction-specific information that would be provided no later than three business days after
application (similar to an early TILA disclosure for closed-end loans). The content of this
disclosure would be similar to the application disclosure, except that it would include
information specific to the consumer based on initial underwriting—most notably, the specific
APR and credit limit. Model forms for the early disclosure were tested for the first time in this
round.
In addition to the shift from an application disclosure to an early disclosure of transactionspecific information, another significant change in the forms for this round was that the early
disclosures included information about multiple payment plan options. In the first two rounds,
application forms had only provided information about one payment plan.
Five forms were tested in Chicago, all of which are provided in Appendix C:
•

Two new early disclosures (ID-1 & ID-2);

•

A revised account-opening disclosure (AO-2);

•

A separate page displaying an Historical Example Table; and

•

A revised version of the Key Questions disclosure.

The interview protocol included the following sections:
•

Interview participants were first asked to review one of the two early disclosure forms, and
were asked a series of questions designed to test their comprehension of the content. They
were then shown the other version of the early disclosure, and asked to compare the
usefulness and clarity of several aspects of the two forms. Participants were shown these two
forms in a rotating order, to minimize learning effects.

•

Next, participants were shown the account opening disclosure (form AO-2). Again, after
reviewing this page they were asked a series of questions designed to test comprehension.

•

Participants were shown the Historical Example Table and were asked a series of questions
designed to assess the usefulness and clarity of the information.

•

Finally, as in the previous round participants were shown the revised Key Questions
document and asked to assess its usefulness and clarity.

Key Interview Findings
Timing of Early Disclosure
•

When asked what kind of information they would want from a potential lender, all
10 participants said that they would want to know what their interest rate would be.

•

In order to evaluate whether participants would find an application disclosure or an early
transaction-specific disclosure given soon after more useful, they were asked whether they
would prefer to get more general information about their HELOC before they applied, or
more specific information (including interest rate) after application. All 10 participants said
that they would prefer to receive a more specific disclosure soon after application even if it
meant that they received no official disclosure of terms before they applied. Participants
indicated that their decision would be the same even if they had to pay an application fee and
submit to a credit check in order to get this more specific disclosure.

Early Disclosures (ID-1 and ID-2)
Information about Interest Rates

•

Most participants were able to identify the initial interest rate on their line of credit. Three,
however, mistakenly thought that the rate shown (5.25%) did not include the margin.

•

All participants were able to identify the maximum APR, as well as how often their rate
could change.

•

None of the participants understood the meaning of the statement under the heading
“Comparing APRs” (i.e., “The APR on a HELOC does not include fees other than interest.
However, APR’s for traditional mortgages and home equity loans include some fees.”) Some
people interpreted this statement to mean that they would not be charged any fees, and were
therefore confused when they subsequently read the information on the form about fees.
None understood after reading the statement how the APRs for closed-end loans and
HELOCs differed.

Fees

•

All participants were able to identify the amount of fees that they could be charged if they
opened a line of credit.

•

As in the previous round, several participants commented that they would like a more
detailed breakdown of their account-opening fees, rather than an aggregate amount.

•

None of the participants noticed the information at the top of the disclosure indicating that
they might be entitled to a refund of fees that they had paid if they decided not to open the
account. Several were surprised when this text was pointed out to them.

Borrowing and Repayment Periods

•

All participants clearly understood that the period of the line of credit was for twenty years,
and that the recipient had 10 years in which to borrow the money, and then an additional
10 years to pay it off. This was a clear improvement over previous rounds, when participants
had significant difficulty understanding the timing of the borrowing and repayment periods.

•

All participants understood that they could only borrow money during the borrowing period,
and that they would have to make payments during both the borrowing and repayment
periods. Again, this was the first round in which this was consistently understood by
participants.

Payment Plans/Plan Comparison

•

All participants understood that the purpose of the Payment Plans section was to provide
borrowers with a choice about how they would pay off their loans.

•

All but one of the participants were able to explain the relative advantages of Plans A and
B—that is, that Plan B offered lower payments during the borrowing period, but that Plan A
did not require a balloon payment and had a lower total of payments.

•

Most participants were also able to explain that the reason that payments during the
borrowing period were lower under Plan B was that these payments included only interest
and no principal.

•

Nine of the 10 participants said that they would choose Plan A over Plan B. In most cases
this was because they did not want to owe a balloon payment, although those who were

shown ID-1 also considered the information in the “Total of All Payments” column of the
sample payments table (information about the total of payments was not shown on ID-2).
•

The five participants who saw ID-1 said that the information “Total of All Payments” column
was very important to them in choosing Plan A over Plan B.

Balloon Payment

•

Almost all participants understood that the balloon payment would be owed at the end of the
repayment period. Although all participants saw the reference to balloon payments on the
disclosure forms, only half could explain exactly what a balloon payment was. Of the
remaining participants, one indicated that it was “a penalty of some kind,” while another that
a balloon payment was made up of interest that had not yet been paid. Others said that they
did not know what a balloon payment was, although all agreed that they would want to avoid
paying one if possible. About half of the participants understood that under Plan B, the
balloon payment could be avoided by paying more than the minimum payment earlier in the
loan term. Other participants were unsure whether this balloon payment could be avoided.

“Risks” Section

•

All participants understood based on their review of the early disclosure that the bank had the
right to terminate their line of credit.

Fixed-Rate Loan Option

•

All of the participants understood from the form that they had the option to borrow up to
$40,000 at a fixed rate. Several, however, were unsure whether or not this $40,000 was in
addition to their $80,000 credit limit.

•

Two participants were surprised by the fixed-rate option, because they did not know that
borrowers could have this option under a line of credit.

Minimum Loan Amount

•

All participants were able to identify the minimum loan amount based on their review of the
early disclosure form.

Comparison of ID-1 and ID-2
•

Most participants indicated that the Risks section should be located at the top of the first page
(as in ID-1), rather than the bottom of the page (as in ID-2). Only one said that she wanted
the APR and credit line information first because “I have good credit and I want to know
what I can get.”

•

The comparison of the two payment plans was presented very differently in the two early
disclosure forms. ID-1 described the two plans in narrative form, while ID-2 included a table
that compared various features of the two plans. When asked which format they found
clearer, participants were mixed. Several said that they preferred the tabular format used in

ID-2 because it required less reading. At the same time, other participants commented that
they found the narrative format in ID-1 easier to understand. Most participants were in
agreement, however, that they liked the fact that ID-1 directly compared the plans in a
section labeled “Plan A vs. Plan B.”
•

The Plan Comparison tables, which provided sample payments, were also organized
differently on the two forms. All participants indicated that they preferred the organization of
the table in ID-2, in which all sample payments under a given payment plan were grouped
together.

•

The Plan Comparison table in ID-1 included a column labeled “Total of All Payments,”
which was not provided on form ID-2. Participants strongly preferred that this column be
included in the table, and several participants who saw ID-1 used this information when
choosing between the two payment plans.

Account-Opening Disclosure (AO-2)
Initial Reactions

•

Participants were generally very comfortable with the account-opening disclosure used in
this round. This appeared to be in large part because it was so similar in format and content
with the early disclosures that participants were shown first. Several participants even
commented that the disclosure looked very similar to the one that was shown to them
previously.

Information about Payments

•

All participants understood that if their interest rate went up, their payment would also
increase.

•

All participants understood that their minimum required payment would stay the same during
the borrowing period, but would increase at the beginning of the repayment period.

•

Unlike in previous rounds, almost all participants understood why the payment during the
repayment period would decrease over time. This increase in comprehension was due to the
fact that AO-2 explained this decrease in the text above the Sample Payments table.

•

Almost all participants were able to estimate what their minimum payments would be on a
$40,000 balance from the information on the form. About half multiplied the payments for
$10,000 by four, while others divided the payments for $80,000 by two. Only one participant
did not know how to estimate what payments would be on a $40,000 balance.

Fees

•

Participants were asked which of the fees shown on the second page of the account-opening
disclosure they would consider most important. Most indicated that they would be most
interested in the breakdown of the account-opening fees, because these were the largest.
Several participants also commented that they would want to understand these fees so that

•

When asked whether there were any additional types of fees that were not listed on the form
that they would want disclosed to them, participants did not identify any.

Historical Example Table
•

Most participants understood that the Historical Example Table showed how their rate could
change over time. As in previous rounds, however, only about half understood that the
information in the table was based on actual historical data.

•

When it was pointed out to them that the Historical Example Table provides historical
information, a few participants commented that they felt it might be unreliable to make
financial decisions based on what has happened in the past. One specifically pointed to the
instability in the current economy as an indicator that financial conditions can change
quickly.

•

Participants were asked whether the Historical Example Table included any important
information that was not in the “Historical Changes to Prime Rate” section of the early and
account-opening disclosures. Most participants indicated that the “Historical Changes to
Prime Rate” section covered the most important content from the Historical Example Table.

Key Questions Disclosure
•

As in the previous round, participants reacted very positively to the Key Questions
disclosure. Several participants indicated that it clarified some concepts that they had
difficulty understanding from the other disclosure forms—particularly the definition of
“balloon payment” and the differences between borrowing and repayment periods.

•

Comprehension of the Key Questions document was very strong; participants were able to
explain in their own words all of the questions and answers. Participants indicated that they
found the language used in this disclosure to be very clear and easy to read.

•

One participant suggested that Question 1 (“Can my interest rate increase?”) and Question 2
(“Can my minimum monthly payment increase?”) could be combined. The same participant
suggested defining the terms “APR,” “index,” “margin,” as was done for “balloon payment”
in Question 4.

•

As in the previous round, one participant indicated that Question 5 (“Do I have to pay any
fees to have a line of credit?”) was unnecessary, since most people would already know this
information.

Subsequent Design Decisions
Timing of Application/Early Disclosure
•

Findings from this round validated the Board staff’s decision to develop and test an early
transaction-specific disclosure that would be given soon after application. Participants
overwhelmingly indicated that they would prefer to be given a disclosure after application
that provides more transaction-specific information, as opposed to a more general application
disclosure. As a result, all subsequent rounds focused on testing this type of early disclosure.

Information about Interest Rates
•

Participants continued to be confused by the statement that, unlike APRs for closed-end
loans, APRs for HELOCs do not include fees. Therefore, this statement was not included in
any subsequent forms.

Fees
•

Because participants in previous rounds consistently indicated that they would like a more
detailed breakdown of their account-opening fees as early as possible in the process, some
versions of the early disclosure tested in subsequent rounds provided this breakdown.

Borrowing and Repayment Periods
•

Because participants’ understanding of both the distinction between the borrowing and
repayment periods and the timing of these periods was significantly better this round than in
previous rounds, the Borrowing and Repayment Terms section was retained on all
subsequent forms with only small changes in wording.

Payment Plans/Plan Comparison
•

Because participants were split as to whether they liked the narrative (ID-1) or tabular (ID-2)
comparison between the two payment plans, both formats were tested again in the next round
of interviews.

•

Participants indicated that they liked the “Plan A vs. Plan B” section of ID-1 that explicitly
compared the two payment plans being offered. As a result, all subsequent early disclosures
included a section that made this direct comparison.

•

Because most participants preferred the format of the Plan Comparison table on ID-2 to that
of ID-1, this format was retained in forms for the next round.

•

In order to prevent “information overload” for consumers, rather than displaying the total of
payments for each payment plan at each interest rate, early disclosures for the next round
simply stated that “with Loan A, you will pay less over time” and “with Loan B, you will pay
more over time.” The goal of this change was to allow participants to continue to use this
term to compare plans without overwhelming them with numbers.

Information about Payments
•

Because of concerns about “information overload” for consumers, forms for the next round
did not show how payments would change over time as the principal was paid off. Instead,
these forms only showed the initial payment of the borrowing and repayment periods, which
based on the assumptions used to calculate the payment examples would have been the
highest payment a consumer would make during those periods. One form simplified the table
even further, and provided only a single sample payment for each interest rate—the initial
payment of the borrowing period.

•

Again because of concerns about “information overload” for consumers, information about
balloon payments was removed from the sample payment table. Instead, an explanatory note
was added near the table indicating whether or not a balloon payment would be due.

Fixed-Rate Loan Option
•

Because some participants mistakenly thought that under the fixed-rate option they would be
able to borrow $40,000 in addition to their $80,000 credit line, the wording of this text was
clarified in the next round.

Historical Example Table
•

Because many participants in all rounds of testing misunderstood the information in the
Historical Example Table, and those who did understand it indicated that this information
was not important to them, none of the forms for subsequent rounds of testing included this
table.

Key Questions Disclosure
•

Although understanding of the difference between the borrowing and repayment periods was
much stronger than in previous rounds, several participants who currently had HELOCs
indicated they had never realized that this distinction existed. For this reason, the decision
was made to give this topic per more prominence on the Key Questions disclosure by having
separate questions address the borrowing and repayment periods (“When can I borrow
money?” and “How soon do I have to pay off my balance?”, respectively). The last question,
which addressed the lender’s right to lower the credit limit, was removed from the form.

INTERVIEWS IN DENVER, COLORADO (APRIL 14-15, 2009)
Objectives and Methodology
The fourth round of 10 cognitive interviews was conducted in Denver, Colorado on April 14 and
15, 2009. The primary focus of this round was to test consumer comprehension of two versions
of the early disclosure. The primary difference between these two forms was that one provided
more detail about sample payments, and that one contained several disclosures that are currently
required by statute while the other did not.
Four forms were tested in Denver, all of which are provided in Appendix C:
•

Two early disclosure forms (ID-3 & ID-4);

•

A revised account-opening form (AO-3); and

•

A revised version of the Key Questions disclosure.

The interview protocol included the following sections:
•

•

Next, participants were shown the account-opening form (AO-3). As in previous rounds,
after reviewing this page they were asked a series of questions designed to test
comprehension.

•

Finally, as in the previous round participants were shown the Key Questions disclosure and
asked to assess its usefulness and clarity.

Key Interview Findings
Previous Experience with HELOCs
•

As in previous rounds, participants’ comments during the opening discussion about their
borrowing history showed that a few did not understand the difference between HELOCs and
home equity loans.

Early Disclosure Forms (ID-3 and ID-4)
Information about Interest Rates

All but one of the participants were able to identify the initial and maximum APRs without
difficulty. All but one also understood that the rate would vary monthly. 8
About half of participants understood the content of the Historical Changes to Prime Rate row;
others were confused as to what this row meant. Some of those that did understand the
information indicated that they might use it to better estimate what their future interest rates
could be. Others, however, said that they would be unlikely to use the information because they
did not think that historical data could necessarily be used to anticipate what would happen to the
interest rate in the future.
Fees

•

All participants understood that they would be charged fees for opening a line or credit, and
all but one identified the amount of those fees without difficulty.

•

ID-3 included a reference that “other fees may apply,” while ID-4 did not. This reference
appeared to be effective; three of the five participants who saw ID-4 incorrectly assumed that
no fees would be charged other than those on shown on the form, compared to only one
participant who was shown ID-3. When shown both forms, most participants believed it was
important to include the reference to other fees.

•

ID-3 provided a breakdown of account opening fees, while ID-4 simply indicated that an
itemized list was available upon request. All participants said that preferred to have the
breakdown shown on the form.

•

All participants except one understood that they could have their fees refunded if they
decided within three days of receiving the early disclosure not to open the line of credit.
Forms ID-3 and ID-4 provided this information in two different locations. Participants who
saw ID-3, which displayed this information at the top of the first page, were able to find it
slightly more easily.

•

Only a few participants realized that they could have their fees refunded even after three
days, if they decided not to open an account because the terms (other than the APR) changed.
Variations in the location of this information between the two early disclosure forms had no
noticeable impact on understanding.

One of the participants in this round had little understanding of HELOCs in general, and had difficulty answering
most of the interview questions.

Borrowing and Repayment Periods

•

All participants read and appeared to understand the description of the borrowing and
repayment periods that was provided on the forms. For example, all understood that they
would only be able to borrow money during the borrowing period, and that they would have
to make payments during both periods.

•

Most participants had difficulty translating what they had read about the borrowing and
repayment periods to their reading of the Plan Comparison table. Several seemed to forget
the distinction between the two periods, and as a result were confused by the fact that the
payment was different. One participant suggested showing the duration of the two periods
(i.e., Years 1 to 10, Years 11 to 20) in the headings of the columns in the Payment Plans and
Plan Comparison sections.

Payment Plans/Plan Comparison

•

Everyone understood that the purpose of the Payment Plans section was to provide the
borrower information about different payment plan options.

•

As in the previous round, one of the forms (ID-3) compared the two payment plans in a
tabular format, while the other (ID-4) provided narrative descriptions of the two plans.
Again, participants’ preferences between the two were mixed; about half felt that the tabular
format was clearer and easier to read, while the other half preferred the narrative
descriptions.

•

Nine of the 10 participants said that they would choose Plan A over Plan B because it would
allow them to avoid a balloon payment and they would pay less over time. All participants
who saw ID-3 also understood that the time it would take to pay off their balance would also
be shorter under Plan A.

•

All participants understood that Plan B would allow them to make lower payments during the
borrowing period. Several participants, however, did not realize that this was because these
lower payments did not include any principal. This confusion was sometimes due to the fact
that participants did not realize that the payment calculation formula could be different
during the borrowing and repayment periods.

•

While ID-3 presented the first monthly payment for both the borrowing and repayment
periods, ID-4 showed only the first monthly payment for the whole term of the account
(i.e., for the borrowing period.) This led to several significant misconceptions on the part of
participants, some of whom assumed that if the interest rate did not change, the payment
would stay constant throughout the entire term. Others stated that they did not know how or
if the payment might change over time. Some realized from the Payment Plans section that
the payment calculation method would change from the borrowing to the repayment period,
and commented that the impact of this on the payment was not shown. One, for example,
called this form “incomplete” because it showed “only half of your program.”

Balloon Payment

•

Everyone had a basic understanding of the term “balloon payment,” and that, if they opted
for Plan B, they might owe a balloon payment at the end of the loan term. In fact, most cited
this as one of the reasons they would opt for Plan A.

•

Most participants understood that paying larger payments up front could help them avoid
paying balloon payments. However, two participants were unsure whether they would be
allowed to make larger payments if they chose Plan B.

“Risks” Section

•

All but one of the participants understood that the bank had the right to terminate their line of
credit.

Fixed-Rate Loan Option

•

All participants understood that they would have the option of borrowing a sum of money at
a fixed rate. Unlike in the previous round, participants generally understood that any money
they borrowed at a fixed rate would apply toward the credit limit for their line of credit.

Minimum Loan

•

All participants understood that they would have to borrow $10,000 upon opening the
account.

Account-Opening Disclosure (AO-3)
Initial Reactions

•

As in the previous round, overall reaction to the account-opening form was very positive and
comprehension was generally high. Again, it appeared that participants’ understanding was
helped by the fact that the account-opening form was so similar in format and content to the
early disclosures they had read earlier.

Fees

•

All participants were able to identify the fee they would be charged for going over their
credit limit.

•

As in the previous round, most participants indicated that information about the accountopening and penalty fees was more important to them than information about transaction
fees. The least important fee to most participants was the foreign transaction fee; most
indicated they did not believe this fee would ever apply to them.

•

When asked whether there were any additional types of fees that they would want disclosed
that were not shown on the form, all participants indicated that there were not.

Information about Payments

•

All participants understood that if the interest rate remained the same and no additional
money was borrowed, the minimum monthly payment would stay the same during the
borrowing period.

•

All but one participant understood that the payment would increase from the borrowing to the
repayment periods; the remaining participant assumed that his payment would remain
constant throughout the term of the loan.

•

All participants understood that if their interest rate went up, their monthly payments would
go up.

•

All participants were able to estimate what their payments would be if they were to borrow
$40,000 rather than the $10,000 or $80,000 balances used in the examples. Most estimated
by multiplying the payments for $10,000 by four; three participants divided the payments for
$80,000 by two.

Importance of Disclosure Statements

•

Near the end of the interview, participants were directed to read several statements on the
account-opening form. They were then asked to indicate how important the statement was to
them, and whether it was necessary to include on the form.

•

Eight of the 10 participants indicated that it was important that the form disclose that there is
no limit to how much their rate could increase in a year.

•

Participants were divided about whether or not the form needed to state that the maximum
rate could be reached as early as the first month. While some indicated this information was
very important, others felt that the statement was not necessary because it was extremely
unlikely that the rate would actually increase that quickly.

•

About half of participants indicated that it was important that the form state that “your
monthly statement will tell you each time your rate changes.” Other participants did not feel
this was important, because even in the absence of this statement they would assume that
they would be notified of rate changes on their statement.

•

Only two participants thought it was important that the form state that the Prime Rate was
published in the Wall Street Journal. One thought it made the offer of credit “more credible,”
while the other thought it was important to know “how the APR is derived.”

Key Questions Disclosure
•

As in previous rounds, participants were very positive about the Key Questions disclosure.
Most commented that the document would be very helpful, particularly for people with no
prior experience with HELOCs.

•

Participants’ comprehension of the information in the Key Questions document was very
high; almost all were able to explain all of the questions and answers in their own words.

Subsequent Design Decisions
Fees
•

Because most participants did not fully understand the circumstances under which they
would be entitled to have their fees refunded, two alternative formats for providing this
information on early disclosures were tested in the next round.

Payment Plans/Plan Comparison
•

The Duration of Line of Credit section continued to be effective in disclosing to participants
the differences between the borrowing and repayment periods. Therefore, a parallel format
was used in forms for the next round to illustrate the difference in how minimum payments
would be calculated during each of the two periods.

•

Because of concerns that a $10,000 hypothetical balance could make sample payments
misleadingly low, in the next round sample payments on the account-opening disclosure
were based on a balance of $80,000—the credit line listed in the disclosure. On the early
disclosures two different methods were used to calculate sample payments; these methods are
explained in the next section.

•

Because some participants who saw ID-4 mistakenly thought that their payment would not
change during the repayment period, the decision was made that the Plan Comparison section
should show the first payment for both the borrowing and repayment periods.

•

Although participants responded positively to the “Time to Pay Off Balance” information
provided for both payment plans, ICF Macro and Board staff were concerned that the length
of repayment would not always be an accurate measure of which payment plan was better for
consumers. Therefore, this information was not included in subsequent forms.

Other Statements on Form
•

Because participants indicated that the reference that the Prime Rate could be found in the
Wall Street Journal would not be useful to them, this disclosure was not included in any
subsequent forms.

Key Questions Disclosure
•

Because of concerns that some consumers in this and previous rounds did not fully
understand the difference between a home equity loan and a HELOC until it was explained to
them, a question about the differences between these two products was added to the Key
Questions document for the final round of testing. A new disclosure was also developed that
described these differences in more detail; this document was also tested in the next round.

INTERVIEWS IN BETHESDA, MARYLAND (MAY 5-6, 2009)
Objectives and Methodology
The fifth round of 10 cognitive interviews was conducted in Bethesda, Maryland on May 5 and
6, 2009. Because this was the final round of testing before the Board was to release its proposed
rules for HELOC disclosures, the goals of this round were to validate previous design decisions
that had been made and to gather data on design issues that were still under discussion.
Participants in this round were also shown a new disclosure that described the differences
between home equity loans and HELOCs.
Five forms were tested in Bethesda, all of which are provided in Appendix C:
•

Two early disclosure forms (ID-5 & ID-6);

•

A revised account-opening form (AO-4);

•

A revised version of the Key Questions disclosure; and

•

A new one-page early disclosure titled “Home Equity Loan vs. Line of Credit.” Like the Key
Questions disclosure, this form would be given to consumers with application.

The interview protocol included the following sections:
•

•

Next, participants were shown the account-opening form (AO-4). As in previous rounds,
after reviewing this page they were asked a series of questions designed to test
comprehension.

•

Next, participants were shown the Key Questions disclosure and asked to assess its
usefulness and clarity.

•

Finally, participants were shown the new disclosure comparing HELOCs to home equity
loans. The goals of this portion of the interview were to assess participants’ understanding of
the information, and to evaluate whether this disclosure provided any additional value to
participants over the Key Questions document.

Key Interview Findings
Early Disclosures (ID-5 and ID-6)
Information about Interest Rates

•

All of the participants were able to easily identify the initial and maximum APRs for the line
of credit.

•

All five participants who saw ID-5 understood that their rate could change monthly, and that
their rate would be the Prime Rate plus 1%. ID-6 did not include either of these pieces of
information; it only stated that the APR “will vary with the market based on the Prime Rate.”

•

Participants strongly preferred the description of how their APR would be calculated used in
ID-5 to that used in ID-6. Several commented that ID-6 did not provide enough information,
and one went so far as to call it “misleading.”

•

As in the previous round, about half of the participants who saw a form that included the
Historical Changes to Prime Rate row understood the information it provided. 9 Participants
who understood the information generally felt it would be useful to them in estimating what
their future interest rate might be—although as in the previous round, they cautioned that
there was no guarantee that the Prime Rate would behave in the future as it had in the past.

Fees

•

All but one of the participants correctly identified the amount of fees that they would have to
pay to take out a line of credit.

•

ID-5 provided a breakdown of account-opening fees, while ID-6 did not. When shown both
forms, all participants indicated that they preferred to have the breakdown shown on the
form—although none of the participants who saw ID-6 first specifically asked for this
information until they were shown ID-5.

•

ID-5 included a reference that “other fees may apply,” while ID-6 did not. As in the previous
round, this reference appeared to be effective; all five participants who saw ID-6 incorrectly
assumed that no fees would be charged other than those on shown on the form. All
participants who were shown ID-5 understood that other fees could be charged.

•

ID-5 displayed information about the refundability of fees at the top of the first page, while ID6 showed it in the Fees section, under the heading “Refundability of Fees.” There was some
evidence that the latter placement was more effective; three of five participants who saw ID-6
first were able to locate this information, compared to none of those who saw ID-5 first.

ID-5 included this row, while ID-6 did not.

Borrowing and Payoff Periods

•

All but one of the participants understood the timing of the borrowing and repayment
periods. They also understood that they could only borrow money during the borrowing
period, and that payments would be due during both periods.

Payment Plans/Plan Comparison

•

All participants were able to explain the relative advantages of both Plans A and B—that is,
that Plan B offered lower monthly payments during the borrowing period and Plan A offered
no balloon payment and a lower total cost.

•

All participants said that they would choose Plan A over Plan B; as in previous rounds, this
decision was based on the fact that no balloon payment would be due under Plan A, and that
this plan costs less over the entire term of the loan.

•

Despite the fact that the early disclosures stated that other plans might be available in
addition to the two being described on the form, seven of the 10 participants incorrectly
assumed that no other plans were available.

•

Sample payments that were shown in the Plan Comparison section were calculated
differently on ID-5 and ID-6. ID-6 payments were based on a balance of $80,000
(the amount of the credit line being offered), borrowed when the account was opened.
Payments on ID-5, on the other hand, were based on an assumption that $10,000 was
borrowed when the account was opened, and an additional $10,000 was borrowed on the last
day of the borrowing period. However, only one of the participants who saw ID-5 understood
the scenario on which these payments were based—even after extensive prompting by the
interviewer.

•

When participants were shown both forms and this difference in payment calculation was
explained, all participants indicated that they preferred the approach used in ID-6. Several
felt that the assumptions made in ID-5 were too complex, and others liked the fact that ID-6
showed the “worst case scenario” of borrowing the entire credit limit.

•

One participant in this round suggested using the heading “An Example of Payments” rather
than “Sample Payments” in the Plan Comparison section, to clarify that the numbers
provided do not represent actual payment amounts and are provided only as an estimate.

Balloon Payment

•

Seven of the 10 participants were able to define what a balloon payment was; the other three
indicated that they would want to avoid a balloon payment but were unsure what it was.

“Risks” Section

•

Almost all participants understood that they would lose their home if they did not make the
required monthly payments.

•

Seven of the 10 participants understood from the form that the bank could end their line of
credit early.

•

Most participants indicated that they preferred to have the Risks section displayed at the top
of the first page, because of the importance of the information. A few preferred to have the
Risks section at the bottom of the page because they were more interested in the specific
terms of their line of credit.

Minimum Loan

•

As in the previous round, all participants understood that they would have to borrow $10,000
upon opening the account.

Account Opening Disclosure (AO-4)
Information about Payments

•

All participants understood that if the interest rate remained the same and no additional
money was borrowed, the minimum monthly payment would stay the same during the
borrowing period.

•

All participants understood that if their interest rate went up, their monthly payments would
go up.

•

While a few participants had difficulty, most were able to estimate what their minimum
payment would be if they borrowed $40,000 instead of the $80,000 shown in the table.

Fees

•

Unlike in the previous round, a few participants were unable to identify the fee that they
would be charged for going over their credit limit. Most, however, were able to find this fee
easily.

•

As in previous rounds, participants indicated that of the fees listed on the form, they would
be most interested in detailed information about the account-opening fees.

Importance of Disclosure Statements

•

As in the previous round, participants were again directed to read several statements on the
account-opening form. As before, they were asked to indicate how important the statement
was to them, and whether it was necessary to include on the form.

•

Almost all participants in this round indicated that the statement “Your monthly statement
will show your rate changes” could be removed from the form. Participants generally felt that

this was not important information, and would not affect their decision-making or behavior in
any way.
•

About half of the participants felt that it was important to include the statement, “There is no
limit on how much the rate can change in one year.”

•

Most participants indicated that it was unnecessary to state that the maximum rate could be
reached in the first month; while this was theoretically true, they felt it was so unlikely that
this statement was not useful.

Key Questions Disclosure
•

As in previous rounds, the Key Questions disclosure was received very favorably by all
participants. Several commented that it was easy to read, and that it asked and answered
important questions about HELOCs.

•

Participants in this round were asked to focus specifically on a new seventh Key Question
that had been added: “Should I get a home equity loan instead of a line of credit?” This
section of the disclosure described the relative advantages and disadvantages of the two
products. All participants indicated that the wording of this section was clear, and after
reading it most were able to describe in their own words the differences between the two
products.

•

One participant who had been planning to get a HELOC said that after reading this form he
thought a home equity loan might be more appropriate for him. Two others commented that
they wished they had received information about home equity loans before taking out their
HELOCs.

Home Equity Loan vs. Line of Credit Disclosure
•

Participants responded positively to this form, and said that it contained useful information.
There were no comprehension issues with the document; participants seemed to understand
all of the content.

•

Participants were asked to compare this disclosure form to the seventh Key Question, which
also provided a comparison of these two products. All of the participants indicated that the
content of the two was very similar; none identified any important information that appeared
on the new disclosure but not in the Key Questions.

Subsequent Design Decisions
Information about Interest Rates
•

Because participants felt strongly that it was important for them to know exactly how their
APR was determined, the final form requires disclosure of the margin that will be used, as
well as how frequently the rate could change.

•

Because participants who were knowledgeable about financial issues said that the Historical
Example paragraph gave them valuable information about how much the Prime Rate was
likely to fluctuate, the decision was made to include this information on both the early and
account-opening disclosures.

Fees
•

Because participants in several rounds of interviews indicated that an itemized breakdown of
account-opening fees would be useful to have as early in the process as possible, the decision
was made to include such a breakdown on both the early and account-opening disclosures.

•

Following this round, the decision was made to include a statement of the early disclosure
that other fees could also be charged in addition to those shown on the form. This disclosure
will be required because in its absence, a large percentage of participants incorrectly assumed
that no other fees would be charged.

•

Because participants in this round were more likely to notice and understand information
about the refundability of fees when it was provided in the “Fees” section of the early
disclosure, this location was retained in the final model form. In order to ensure that
participants are aware that fees paid may be refundable in some cases, another reference to
this information was also added at the end of the form.

Payment Plans/Plan Comparison
•

Because participants in this round had a strong understanding of the two payment plans, the
format in which these plans were described was retained in the final model early disclosure
form.

•

Participants strongly preferred to be shown payment examples based on a loan equal to their
credit limit (as in ID-6), rather than payments based on a more complex set of assumptions
(as in ID-5). Therefore, this method of calculating sample payments was used in the model
early disclosure form.

“Risks” Section
•

As noted above, participants were divided as to whether the Risks section should be at the
top or the bottom of the form. Regardless of the placement of the section, most participants
noticed and understood the disclosures about the risk of loss of the home in case of default
and the disclosure about a creditor’s right to terminate the plan in certain circumstances. In
the Board staff’s outreach, neither industry nor consumer group representatives indicated a
preference for either placement. Consumer group representatives did, however, emphasize
the importance of highlighting key terms such as the APR. Therefore, the model early
disclosure forms and account-opening form place the Risks section at the bottom of the form.

Other Statements on Form
•

Because a large portion of participants in the last two rounds indicated that they did not
provide important information, the decision was made to remove from the final model form
references to the fact that rate changes will be shown on the monthly statement and that the
maximum APR could be reached as early as the first month. However, because several
participants indicated that they found the statement “There is no limit on how much the rate
can change in one year” to be important, this information was retained on the model form.

Key Questions Disclosure
•

Because the new question comparing HELOCs to home equity loans was considered so
important by participants in this round, it was retained in the final disclosure.

•

Because participants indicated that the new one-page disclosure about HELOCs and home
equity loans was largely redundant with the Key Questions disclosure, the decision was made
not to require that the stand-alone form be provided to consumers.

CHAPTER IV: SUMMARY
This report summarizes work conducted by ICF Macro from December 2008 through June 2009
in support of the Board’s efforts to revise Regulation Z rules pertaining to disclosures for home
equity lines of credit. The outcomes of this work include the development of:
•

A new “early” disclosure, that provides transaction-specific information no more than three
business days after an application for a home equity line of credit is submitted. This
disclosure describes:

A description of potential risks, including possible termination or suspension of the line
of credit by the lender;

How the interest rate for the line of credit will be determined;

The total amount of account-opening fees that will be charged, as well as a summary
breakdown of those fees, and certain other fees such as the annual fee;

The credit limit;

Minimum transaction and minimum balance requirements;

The distinction between the borrowing and repayment periods for the line of credit, as
well as the timing of both of the periods;

Two payment plans available to borrowers, along with sample payments for each; and

Information about the timing and size of any balloon payments that might be owed.

•

A revised account-opening disclosure that mirrors the content and tabular format of the early
disclosure and provides additional detail about penalty and transaction fees; and

•

A new document titled “Key Questions to Ask About Home Equity Lines of Credit,” a
concise and easy-to read disclosure for potential borrowers that provides guidance on what
questions they should ask their lenders.

The results of the interviews described in this report will inform the Board’s proposed revisions
to Regulation Z, which are scheduled for release in July 2009. The disclosure forms developed
through iterative testing will be released with the proposal as model forms. By relying heavily on
direct consumer testing in the development of these forms, the Board hopes to ensure that its new
regulations will lead to financial disclosures that will be easy for consumers to read and
understand, and as a result will help them make well-informed financial decisions.

APPENDIX A:
Sample Recruitment
Protocol

Participant Screener for Federal Reserve Board In-Depth Interviews
Bethesda, MD
May 5th and 6th, 2009
General Information and Recruiting Specifications
�

Interviews will be held at 9:00 a.m., 11:00 p.m., 1:00 p.m., 3:00 p.m., and 5:00 p.m. each day

�

INTERVIEWERS: Ask all participants to bring their reading glasses if necessary, because they
will be asked to read several sample mortgage documents as part of the interview or focus
group.

Recruiting Script
Hello, I am calling on behalf of the United States Federal Reserve Board. The Federal Reserve Board
is sponsoring a series of consumer interviews in your area so that we can learn more about how people
make financial decisions. We will use what we learn from these interviews to help make sure that the
information that banks provide to consumers about various financial products is useful and easy to
understand.
Q1: Do you currently own a home?
�
�

Yes � Continue
No � Thank respondent politely and end call.

Q2: Have you ever taken out a loan against equity in your home to pull money out for some purpose,
either as a second mortgage at the time you purchased your home, or for home improvements, debt
consolidation or to cover other expenses?
�
�

Yes � Continue
No � Skip to Q7

Q3: Was this mortgage related to a property for your own use, or a property you purchased solely as an
investment?
�
�

Own Use � Continue
Investment � Thank respondent politely and end call.

Q4: There are at least two ways in which a consumer can borrow money against equity in his or her
home. One is a traditional mortgage where you borrow a fixed sum of money at once and pay it back
over time. The other is a home equity line of credit (also known as a “HELOC”) which allows you to
draw money when you need it. At any point in the past five years, have you had a home equity line of
credit (or “HELOC”)?
�
�

Yes � Participant qualifies in Group A; skip to after Q7 (but ask Q8 & Q8b)
No � Continue

Q5: At any point in the past five years have you had a second mortgage on your home, or a mortgage
that you obtained after paying off the original mortgage on your home?
Note to Interviewer: Be sure that participant understands that this question is asking about a
traditional loan, not a HELOC.
�
�

Yes � Continue
No � Skip to Q7

Q6: At the time you obtained this loan, did you consider instead getting a home equity line of credit?
�
�

Yes � Participant qualifies in Group B; skip to after Q8
No � Continue

Q7: Have you considered obtaining a home equity line of credit at any time in the last five years?
�
�

Yes � Participant qualifies in Group C; Continue after Q8
No � Thank respondent politely and end call.

-----------------------------------------------------------------------------------Great. We will be holding interviews in Bethesda on May 5th and 6th. I was wondering if you would be
interested in attending.
�
�

Yes � Continue to screening questions
No � Record reason (not interested, not available on that date, etc.). If unavailable on that
date, retain their information because we may do additional rounds of testing in the
future. Thank them politely and end call.

That’s great. I just need to ask you a few more questions to see if you qualify for one of our
interviews.
Q8:

Were you the person in your household who was responsible for making the decision to get this
home equity line of credit or home equity loan?
Yes � Continue
� Yes, in cooperation with my [spouse, partner, etc.] � Continue
� No � Ask the respondent whether the primary decision maker is available to join the call.
If not, thank respondent politely and end call.
�

Q9:

Do you work, or have you ever worked, fora bank or other financial institution, or in the real
estate or mortgage industry?
�
�

Q10:

Yes � Thank respondent politely and end call.
No � Continue

ARTICULATION QUESTION: In a few sentences, could you explain why you decided to take
out a line of credit/home equity loan?
�
�

If respondent gives a thoughtful, articulate answer � Continue
If respondent does not give a thoughtful, articulate answer � Thank respondent politely
and end call.
Recruiting Quotas

Screening Criteria
� At least seven participants
must be in Group A.
� At least three participants
must be in Group B.
� Group C is a back-up in
case not enough
participants are recruited
for groups A and B.

Q11a: Have you experienced any of the following financial hardships
in the past 7 years: bankruptcy, foreclosure, repossession, or a
tax lien?
a) Yes
b) No
Q11b: How would you rate your credit?
a)
b)
c)
d)

Excellent
Good
Fair
Poor

At least three (but no more
than five) recruits must
answer:
� “a” to Q11a; or
� “c” or “d” to Q11b.

Q12: Do you currently have an outstanding balance on your HELOC?
� Yes
� No
Q12b: What is the current outstanding balance on your HELOC?
� $70,000+
� $30,000 - $70,000
� $10,000 - $30,000
� Less than $10,000

At least three (but no more
than six) recruits should
answer “Yes” to Q12

Recruiting Quotas
Q13: What is your age?
a) 18 to 35
b) 36 or above
Q14: Which of the following categories best reflects your race or
ethnicity? You can choose more than one category.
[Respondents who wish to choose more than one category should
be counted as minorities, even if one race mentioned is White.]
a)
b)
c)
d)
e)

White
Black or African-American
Hispanic or Latino
Asian or Pacific Islander
Native American or Alaska Native

Q15: What is the highest level that you reached in school?
a) High school degree or less
b) Some college work
c) College graduate
Q16: Gender

Screening Criteria
At least 2 recruits should
respond “a”

At least 4 recruits should
respond “c”, “d”, “b” or “e”

� At least 2 recruits should
respond “a”
� At least 3 recruits should
respond “b”
At least 3 recruits of each
gender

If participant qualifies: Based on your responses, we would like to invite you to participate in an
interview, which will be held at Shugoll Research in Bethesda, MD. The interview will last about 90
minutes. We will be showing you some sample financial documents for you to refer to, so if you use
reading glasses please be sure that you bring them.

APPENDIX B:
Participant Demographic
and Background
Information

2
0
2

African�American
Hispanic
Asian

36+

Female

18�35

Male

Caucasian

1
0
9

High school or less

Some college

College graduate

Education Level

Race

Age

Gender

Bethesda, MD
(Dec. ’08
Interviews)

Los Angeles, CA
(Feb. ’09
Interviews)

Chicago, IL
(March ’09
Interviews)

Denver, CO
(April ’09
Interviews)

Bethesda, MD
(May ’09
Interviews)

28 (56%)

15 (30%)

7 (14%)

4 (8%)

10 (20%)

13 (26%)

23 (46%)

40 (80%)

10 (20%)

30 (60%)

20 (40%)

Total

Los Angeles, CA
(Feb. ’09
Interviews)

1
0

Fair
Poor

Had home equity loan in past 5 years;
considered HELOC as an alternative?
No HELOC or home equity loan in past
5 years; but considered HELOC?

Had a HELOC in past 5 years?
3
2

Good

Previous Experience with HELOCs

Excellent

Self�Reported Credit Rating?

Yes

Financial Hardship (e.g., bankruptcy, foreclosure) in Past 7 Years?

Bethesda, MD
(Dec. ’08
Interviews)

Chicago, IL
(March ’09
Interviews)

Denver, CO
(April ’09
Interviews)

Bethesda, MD
(May ’09
Interviews)

4 (8%)

9 (18%)

37 (74%)

3 (6%)

10 (20%)

14 (28%)

23 (46%)

40 (80%)

10 (20%)

Total

N/A
N/A

Not Applicable

N/A

Los Angeles, CA
(Feb. ’09
Interviews)

This question was not added to the screener until the Denver round of testing.

N/A

Yes

Outstanding Balance on HELOC? 1

Bethesda, MD
(Dec. ’08
Interviews)

N/A

Chicago, IL
(March ’09
Interviews)

Denver, CO
(April ’09
Interviews)

Bethesda, MD
(May ’09
Interviews)

3 (15%)

7 (35%)

10 (50%)

Total

APPENDIX C:
Disclosure Forms Used
in Testing

Round 1:
Bethesda, MD
December 17-18, 2008
 Current Application Disclosure
 New Account-Opening Disclosure
 Payment Example Form

THINGS YOU SHOULD KNOW BEFORE APPLYING FOR
A HOME EQUITY LINE OF CREDIT (HELOC)

Home Equity Line of Credit Program Disclosure
This disclosure contains important information about our Home Equity Line of Credit (HELOC).
Please read it carefully and keep a copy for your records.

Availability of Terms
All of the terms described below are subject to change. If these terms change (other than the
annual percentage rate) and you decide, as a result, not to enter into an agreement with us, you
are entitled to a refund of any fees that you paid to us or anyone else in connection with your
application.

Security Interest
ABC Bank will take a mortgage on your home, so you could lose your home if you do not meet
the obligations in your agreement with us.

Possible Actions
Under certain circumstances, ABC Bank can terminate your line, require you to pay the
outstanding balance in one payment, and charge you fees upon termination; refuse to make
additional extensions of credit; reduce the credit limit; and, as specified in the credit agreement,
make certain changes in the plan. If you ask, we will give you specific information concerning
when we can take these actions.

Requesting an Advance
You may request an advance by writing HELOC checks that ABC Bank has given to you for this
purpose, by transferring funds via telephone or internet, or authorizing ABC Bank to move funds
into your transaction account. The minimum advance amount is $250.

Minimum Payment Requirements
You can obtain credit advances for 10 years (the "draw period"). At the end of 10 years, you
may have the option to renew the "draw period," subject to our consent. During the draw period,
payments will be due monthly. Your minimum monthly payment will equal the amount of earned
fees and charges and the amount of accrued interest on the last day of the billing cycle. The
minimum monthly payments during the draw period will not reduce the principal that is
outstanding on your line. After the draw period ends, you will no longer be able to obtain credit
advances and must pay the outstanding balance on your account (the "repayment period").
The length of the repayment period is 10 years. During the repayment period, payments will be
due monthly. Your minimum monthly payment will equal the amount of earned fees and
charges, the amount of accrued interest on the last day of the billing cycle plus 1.500% of the
loan account balance, which is principal plus accrued interest. There is no minimum finance
charge. The minimum monthly payments may not be sufficient to fully repay the principal on
your line by the end of the draw and repayment periods. If they are not, you will then be required
to pay the entire balance in a single payment at maturity.

Minimum Payment Example
If you made only the minimum monthly payment and took no other credit advances, it would
take 20 year(s) to pay off a credit advance of $10,000 at an ANNUAL PERCENTAGE RATE of
8.5%. During that period, you would make 120 payment(s) of $70.83 followed by 120
payment(s) varying between $221.90 and $36.82, with a final payment of $1609.63.

Fees and Charges
You must pay certain fees to third parties to open the plan. These fees generally total between
$0.00 and $1,000.00. If you ask, we will give you an itemization of the fees you will have to pay
to third parties. There is no annual fee for the first year of the program, provided your account
remains open through the first year. If you close your account within the first year, there will be
an early termination fee of $250. There is an annual $50 fee in subsequent years.

Tax Deductibility
You should consult a tax advisor regarding the deductibility of interest and charges for the plan.

Variable Rate Features
This plan has a variable rate feature and the annual percentage rate (corresponding to the
periodic rate) and the minimum monthly payment can change as a result. The annual
percentage rate includes only interest and not other costs. The annual percentage rate is based
on the value of an index. The index is The Wall Street Journal Prime Rate as published in The
Wall Street Journal. To determine the annual percentage rate that will apply to your account,
ABC Bank adds a margin to the value of the index. The initial annual percentage rate may be
determined by ABC Bank and may not necessarily be based on the index and margin used to
make later rate adjustments. This discounted initial rate will be in effect for the first year your
plan is open. Ask us for the current index value, margin, discount, and annual percentage rate.

Rate Changes
The annual percentage rate can change daily. There is no limit on the amount by which the rate
can change in a one-year period. The maximum annual percentage rate that can apply during
the plan is 24.990%, or the maximum annual percentage rate allowed by applicable law,
whichever is less. Rate change information will be included in your monthly statement.

Maximum Rate and Payment Examples
If you had an outstanding balance of $10,000 at the beginning of the draw period, the minimum
monthly payment at the maximum ANNUAL PERCENTAGE RATE of 24.990% would be
$208.25. The maximum annual percentage rate during the draw period could be reached in the
first month. If you had an outstanding balance of $10,000 at the beginning of the repayment
period, the minimum monthly payment at the maximum ANNUAL PERCENTAGE RATE of
24.990% would be $361.37. The maximum annual percentage rate during the repayment period
could be reached in the first month.

Historical Example
The following table shows how the annual percentage rate and the minimum payments for a
single $10,000 credit advance would have changed based on changes in the index over the last
15 years. The index values are from the first business day of January. While only one payment
amount per year is shown, payments would have varied during each year. The table assumes
that no additional credit advances were taken, that only the minimum payment was made, and
that the rate remained constant during each year. It does not necessarily indicate how the index
or your payments would change in the future.

Historical Example Assuming a $10,000 Balance
Index

Margin

Annual Percentage
Rate (APR)

10.000 %

0.000 %

10.000 %

Minimum Monthly
Payment

Draw Period
1991

$ 83.33

1992

6.500 %

0.000 %

6.500 %

$ 54.17

1993

6.000 %

0.000 %

6.000 %

$ 50.00

1994

6.000 %

0.000 %

6.000 %

$ 50.00

1995

8.500 %

0.000 %

8.500 %

$ 70.83

1996

8.500 %

0.000 %

8.500 %

$ 70.83

1997

8.250 %

0.000 %

8.250 %

$ 68.75

1998

8.500 %

0.000 %

8.500 %

$ 70.83

1999

7.750 %

0.000 %

7.750 %

$ 64.58

2000

8.500 %

0.000 %

8.500 %

$ 70.83

Repayment Period
2001

9.000 %

0.000 %

9.000 %

$ 226.13

2002

4.750 %

0.000 %

4.350 %

$ 158.42

2003

4.250 %

0.000 %

4.250 %

$ 129.11

2004

5.250 %

0.000 %

5.250 %

$ 112.52

2005

5.250 %

0.000 %

5.250 %

$ 93.72

HOME EQUITY LINE OF CREDIT (HELOC) STATEMENT of TERMS
BORROWER:
COLLATERAL:

Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345

September 23, 2008
LENDER:
ABC Bank
LOAN NUMBER: 123-12-1234-556
DATE:

You have no obligation to accept this line of credit. Compare these credit terms to other credit offers. Confirm that these are
the credit terms for which you applied. Know your rights as a borrower; visit www.frb.gov/consumers/HELOC.htm.

Credit Limit & Annual Percentage Rate
Credit Limit

$80,000

Annual Percentage Rate
(APR)

4.00% introductory APR for the first six months.
After that, your APR will be the Prime Rate + 2.00%. The Prime Rate,
which is published daily in the Wall Street Journal, is currently 4.00%.
The APR on a HELOC does not include costs other than interest.

Maximum APR

24.99%

Credit Advances and Payments
Minimum Draw

$ 300.00

Draw Period

10 years. A minimum monthly payment will be required during this time.

Repayment Period

20 years, starting when the draw period ends. You will not be able to
draw funds during the repayment period.

Balloon Payment

At the end of the repayment period, you may be required to pay any
remaining balance in a lump sum.

Fees (see page 2 for more details)
Annual Fee

$50

Total Account Opening Fees

$1,740

Other Important Information
Risk of Foreclosure

Your line of credit is secured by your home, which means that you could
lose your home if you are unable to repay the money you borrowed.

Our Right to Terminate or
Reduce Your Line of Credit

Under certain circumstances, we can terminate your line, require you to
pay the outstanding balance in one payment, and charge you fees upon
termination; refuse to make additional extensions of credit; reduce the
credit limit; and, as specified in your account agreement, make certain
changes in the plan. For more information, please ask us or see your
account agreement.

Billing Rights

Information on your rights to dispute transactions and how to exercise
those rights is provided in your account agreement.

Tax Deductibility

Consult a tax advisor regarding deductibility of interest under this plan.

H-O – 12/16/2008

Account Opening Fees
Loan Origination Fee

350

Loan Discount Fee

800

Underwriting Fee

295

Appraisal

295

TOTAL Account Opening Fees

$ 1,740

Penalty Fees
Late Payment
Over-the-Credit Limit
Returned Payment
Early Termination

Either $15 or 5% of the minimum payment, whichever is greater. This fee is
imposed 15 days after the payment due date.
$20 for each advance from the Credit Line that causes you to exceed your
credit limit.
$30
.125% of the credit limit or $500, whichever is greater, if you close the line of
credit within three years.

Transaction Fees
Cash Advance

Either $2 or 2% of the amount of each advance, whichever is greater.

Wire Transfer

$20

Courier Service

$30 per transmittal of documents that you request we send by a delivery
service.

Stop Payment

$20 when you request a stop payment on a check written from this account.

Other transaction fees may also apply.

H-O – 12/16/2008

PAYMENT EXAMPLES
Minimum Monthly Payment
Your minimum monthly payment can vary each month, depending on a number of factors such as
your balance and annual percentage rate (APR), or whether you pay both interest and principal
or only the interest each month. The maximum APR that could apply to your loan is 24.99%, and
this APR can be reached as soon as the first month after you open your account.
Payments During Draw Period
During the dra w period, your minimum monthly payments cover only the interest that you o we on the
outstanding balance. If you make only the minimum payments during this period, you will not pay off
any of your loan principal. Your dra w period lasts 10 years.
Payments During Repayment Period
During the repayment period, your minimum monthly payments cover the greater of 1% of the
outstanding balance, or the interest you o we on the outstanding balance. The repayment period
starts at the end of the dra w period and lasts 20 years.
Balloon Payment
If you make only the minimum payments, you may not pay off all, or possibly any, of the amount
you actually borro wed by the end of the loan term and may have to pay the outstanding balance
in a single large payment. This is known as a balloon payment. You should ask your lender
under what circumstances you may owe a balloon payment.
The tables below sho w examples of the minimum monthly and balloon payments you would have
to make given different balances and different Annual Percentage Rates.

Sample Payments If You Borrowed $10,000

Draw Period Minimum Payment
120 payments
Repayment Period Minimum Payment
239 payments
Balloon Payment Final payment due
1 payment

Current APR

Maximum APR

6.00%

24.99%

$50.00

$208.25

$100.00 to $30.48

$208.25

$3,048.32

$10,208.25

Sample Payments If You Borrowed $80,000

Draw Period Minimum Payment
120 payments
Repayment Period Minimum Payment
239 payments
Balloon Payment Final payment due
1 payment

Current APR

Maximum APR

6.00%

24.99%

$400.00

$1,666.00

$800.00 to $243.84

$1,666.00

$24,386.56

$81,666.00

12/16/2008

Round 2:
Los Angeles, CA
February 11-12, 2009









Current Application Disclosure (AD-1)
Revised Application Disclosure (AD-2A)
Revised Application Disclosure (AD-2B)
Revised Application Disclosure (AD-3A)
Revised Application Disclosure (AD-3B)
Account-Opening Disclosure (AO-A)
Account-Opening Disclosure (AO-B)
Key Questions Disclosure

THINGS YOU SHOULD KNOW BEFORE APPLYING FOR
A HOME EQUITY LINE OF CREDIT (HELOC)

Home Equity Line of Credit Program Disclosure
This disclosure contains important information about our Home Equity Line of Credit (HELOC).
Please read it carefully and keep a copy for your records.

Security Interest
ABC Bank will take a mortgage on your home, so you could lose your home if you do not meet
the obligations in your agreement with us.

Minimum Payment Requirements
You can obtain credit advances for 10 years (the "borrowing period"). At the end of 10 years,
you may have the option to renew the "borrowing period," subject to our consent. During the
borrowing period, payments will be due monthly. Your minimum monthly payment will equal the
amount of earned fees and charges and the amount of accrued interest on the last day of the
billing cycle. The minimum monthly payments during the borrowing period will not reduce the
principal that is outstanding on your line. After the borrowing period ends, you will no longer be
able to obtain credit advances and must pay the outstanding balance on your account (the
"payoff period").
The length of the payoff period is 10 years. During the payoff period, payments will be due
monthly. Your minimum monthly payment will equal the amount of earned fees and charges, the
amount of accrued interest on the last day of the billing cycle plus 1.500% of the loan account
balance. There is no minimum finance charge. The minimum monthly payments may not be
sufficient to fully repay the principal on your line by the end of the borrowing and payoff periods.
If they are not, you will then be required to pay the entire balance in a single payment at
maturity.

Tax Deductibility
If you borrow more than your home is worth, the interest on the excess amount is not deductible
for federal income tax purposes. You should consult a tax advisor regarding the deductibility of
interest and charges for the plan.

AD-1 2/6/2009

Rate Changes
The annual percentage rate can change monthly. There is no limit on the amount by which the
rate can change in a one-year period. The maximum annual percentage rate that can apply
during the plan is 24.990%, or the maximum annual percentage rate allowed by applicable law,
whichever is less. Rate change information will be included in your monthly statement.

Maximum Rate and Payment Examples
If you had an outstanding balance of $10,000 at the beginning of the borrowing period, the
minimum monthly payment at the maximum ANNUAL PERCENTAGE RATE of 24.990% would
be $208.25. The maximum annual percentage rate during the borrowing period could be
reached in the first month. If you had an outstanding balance of $10,000 at the beginning of the
payoff period, the minimum monthly payment at the maximum ANNUAL PERCENTAGE RATE
of 24.990% would be $361.37. The maximum annual percentage rate during the payoff period
could be reached in the first month.

Historical Example Assuming a $10,000 Balance
Index

Margin

Annual Percentage
Rate (APR)

Minimum Monthly
Payment

Borrowing Period
1991

10.000 %

0.000 %

10.000 %

$ 83.33

1992

6.500 %

0.000 %

6.500 %

$ 54.17

1993

6.000 %

0.000 %

6.000 %

$ 50.00

1994

6.000 %

0.000 %

6.000 %

$ 50.00

1995

8.500 %

0.000 %

8.500 %

$ 70.83

1996

8.500 %

0.000 %

8.500 %

$ 70.83

1997

8.250 %

0.000 %

8.250 %

$ 68.75

1998

8.500 %

0.000 %

8.500 %

$ 70.83

1999

7.750 %

0.000 %

7.750 %

$ 64.58

2000

8.500 %

0.000 %

8.500 %

$ 70.83

2001

9.000 %

0.000 %

9.000 %

$ 226.13

2002

4.750 %

0.000 %

4.750 %

$ 158.42

2003

4.250 %

0.000 %

4.250 %

$ 129.11

2004

5.250 %

0.000 %

5.250 %

$ 112.52

2005

5.250 %

0.000 %

5.250 %

$ 93.72

Payoff Period

AD-1 2/6/2009

THINGS YOU SHOULD KNOW BEFORE APPLYING FOR A
HOME EQUITY LINE OF CREDIT (HELOC)
This disclosure contains important information about our Home Equity Line of Credit (HELOC). Please read it
carefully and keep a copy for your records.

Risks
These terms can
change

All of the terms described below are subject to change. If these terms change
(other than the Annual Percentage Rate) and you decide, as a result, not to
enter into an agreement with us, you are entitled to a refund of any fees that
you paid to us or anyone else in connection with your application.

You could lose your
home

Your line of credit will be secured by your home, which means that you could
lose your home if you are unable to repay the money you borrowed.

You may not be able
to draw on your line of
credit

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance
in one payment, and charge you fees upon termination;

�

Refuse to make additional extensions of credit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

If you ask, we will give you specific information about when we can take
these actions.
The interest you pay
may not be tax
deductible

If you borrow more than your home is worth, the interest on the excess amount
is not deductible for federal income tax purposes. Consult a tax advisor
regarding the deductibility of interest under this plan.

Credit Line
Credit Limit

Your credit limit will be based on your creditworthiness and other factors.

Minimum Balance

You must keep a minimum balance of at least $500 at all times.

Minimum Loan

The minimum amount that you can borrow at any time is $300.

Minimum Initial Loan

You must borrow at least $10,000 when you open the account.

Annual Percentage Rate
Annual Percentage Rate
(APR)

4.00% to 9.00% when you open your line of credit, based on your
creditworthiness.
Your APR will be based on the Prime Rate plus a margin between 0.00% and
5.00%, and will vary monthly with the market. There is no limit on the amount
by which the APR can change in a one-year period. Rate change information
will be included in your monthly statement.
This APR does not include fees other than interest (unlike the APRs for
traditional mortgages and home equity loans, which include some closing
costs).

Maximum APR

24.99%. The maximum APR could be reached as soon as the first
month that your line of credit is open.

Fees
Annual Fee

$50

Total Account Opening Fees

Up to $1,700

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close the line of
credit within three years.

AD – 2A –02/07/09

Borrowing and Payoff Periods
Borrowing Period

Payoff Period

2009 – 2018

2019 - 2028

Can I borrow money during this
period?

Yes

Is a monthly payment due
during this period?

Yes

Does my minimum monthly
payment during this period
cover any principal?

No, the minimum payment covers
only the interest owed and your
loan balance will not decrease.

Yes, the minimum payment covers
interest and 1.5% of your principal
balance, but you will not pay off the entire
balance and will owe a “balloon payment”
at the end of the loan term (see example
below).

Minimum Monthly Payment Example for a $10,000 Balance
Minimum Payment
during Borrowing
Period

Minimum Payment
during Payoff Period

Final Balloon
Payment

4.00% (minimum under plan)

$33.33

$183.33 decreasing to $31.28

$1,686.24

6.00%

$50.00

$200.00 decreasing to $34.12

$1,689.05

12.00%

$100.00

$250.00 decreasing to $42.66

$1,697.45

24.99% (maximum under plan)

$208.25

$358.25 decreasing to $61.13

$1,715.64

Interest Rate

Historical Example Assuming a $10,000 Balance
The following figures show how the annual percentage rate and the minimum payments for a single $10,000
credit advance would have changed based on changes in the index over the last 15 years. The index values are
from the first business day of January. While only one payment amount per year is shown, payments would have
varied during each year. The table assumes that no additional credit advances were taken, that only the minimum
payment was made, and that the rate remained constant during each year. It does not necessarily indicate how
the index or your payments would change in the future.

Index

Margin

Annual Percentage
Rate (APR)

Minimum Monthly Payment

Borrowing Period
1991

10.000 %

0.000 %

10.000 %

$ 83.33

1992

6.500 %

0.000 %

6.500 %

$ 54.17

1993

6.000 %

0.000 %

6.000 %

$ 50.00

1994

6.000 %

0.000 %

6.000 %

$ 50.00

1995

8.500 %

0.000 %

8.500 %

$ 70.83

1996

8.500 %

0.000 %

8.500 %

$ 70.83

1997

8.250 %

0.000 %

8.250 %

$ 68.75

1998

8.500 %

0.000 %

8.500 %

$ 70.83

1999

7.750 %

0.000 %

7.750 %

$ 64.58

2000
8.500 %
Payoff Period

0.000 %

8.500 %

$ 70.83

2001

9.000 %

0.000 %

9.000 %

$ 226.13

2002

4.750 %

0.000 %

4.750 %

$ 158.42

2003

4.250 %

0.000 %

4.250 %

$ 129.11

2004

5.250 %

0.000 %

5.250 %

$ 112.52

2005

5.250 %

0.000 %

5.250 %

$ 93.72

AD – 2A –02/07/09

Risks
These terms can
change

Your could lose your
home

Your line of credit will be secured by your home, which means that you could
lose your home if you are unable to repay the money you borrowed.

You may not be able
to draw on your line of
credit

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance
in one payment, and charge you fees upon termination;

�

Refuse to make additional extensions of credit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

If you ask, we will give you specific information about when we can take
these actions.
The interest you pay
may not be tax
deductible

Credit Line
Credit Limit

Your credit limit will be based on your creditworthiness and other factors.

Minimum Balance

You must keep a minimum balance of at least $500 at all times.

Minimum Withdrawal

The minimum amount that you can borrow at any time is $300.

Minimum Initial Withdrawal

You must borrow at least $10,000 when you open the account.

Annual Percentage Rate
Annual Percentage Rate
(APR)

4.00% to 9.00% when you open your line of credit, based on your
creditworthiness.
After that, your APR will vary monthly with the market based on the Prime Rate.
There is no limit on the amount by which the APR can change in a one-year
period. Rate change information will be included in your monthly statement.
This APR does not include fees other than interest (unlike the APRs for
traditional mortgages and home equity loans, which include some closing
costs).

Maximum APR

24.99%. The maximum APR could be reached as soon as the first
month that your line of credit is open.

Fees
Annual Fee

$50

Total Account Opening Fees

Up to $1,700

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close the line of
credit within three years.

AD – 2B –02/07/09

Minimum Monthly Payment Amounts for a $10,000 balance
Withdrawal Period

Payoff Period

2009 – 2018

2019 - 2028

Minimum Monthly Payment

4.00% (minimum under plan)

$33.33

$183.33 decreasing to $31.28

6.00%

$50.00

$200.00 decreasing to $34.12

12.00%

$100.00

$250.00 decreasing to $42.66

24.99% (maximum under plan)

$208.25

$358.25 decreasing to $61.13

Interest Rate

Product Features
Are withdrawals allowed
during this period?

Yes

Is a monthly payment due
during this period?

Yes

Does my minimum monthly
payment during this period
cover any principal?

No, this minimum payment covers
only the interest owed and will not
decrease your loan balance.

Yes, the minimum payment covers
interest and 1.5% of your principal
balance.

Will I owe a balloon payment?

If you make only the minimum payments each month you will not pay off the
entire balance and will have to make a “balloon payment”. For example, if you
borrowed $10,000 and made only minimum payments each month, at the end
of the loan you would owe a balloon payment of up to $1,715.

Index

Margin

Annual Percentage
Rate (APR)

Minimum Monthly Payment

Borrowing Period
1991

10.000 %

0.000 %

10.000 %

$ 83.33

1992

6.500 %

0.000 %

6.500 %

$ 54.17

1993

6.000 %

0.000 %

6.000 %

$ 50.00

1994

6.000 %

0.000 %

6.000 %

$ 50.00

1995

8.500 %

0.000 %

8.500 %

$ 70.83

1996

8.500 %

0.000 %

8.500 %

$ 70.83

1997

8.250 %

0.000 %

8.250 %

$ 68.75

1998

8.500 %

0.000 %

8.500 %

$ 70.83

1999

7.750 %

0.000 %

7.750 %

$ 64.58

2000

8.500 %

0.000 %

8.500 %

$ 70.83

Payoff Period
2001

9.000 %

0.000 %

9.000 %

$ 226.13

2002

4.750 %

0.000 %

4.750 %

$ 158.42

2003

4.250 %

0.000 %

4.250 %

$ 129.11

2004

5.250 %

0.000 %

5.250 %

$ 112.52

2005

5.250 %

0.000 %

5.250 %

$ 93.72

AD – 2B –02/07/09

THINGS YOU SHOULD KNOW BEFORE APPLYING FOR A
HOME EQUITY LINE OF CREDIT (HELOC)
These are the credit terms we offer on our home equity line of credit (HELOC). Compare these credit terms to other
credit offers. Know your rights as a borrower; visit www.frb.gov/consumers/HELOC.htm.

Credit Line
Credit Limit

Your credit limit will be based on your creditworthiness and other factors.

Minimum Balance

You must keep a minimum balance of at least $500 at all times.

Minimum Loan

The minimum amount that you can borrow at any time is $300.

Minimum Initial Loan

You must borrow at least $10,000 when you open the account.

APR
Annual Percentage Rate
(APR)

4.00% to 9.00% when you open your line of credit, based on your
creditworthiness.
Your APR will be based on the Prime Rate plus a margin between 0.00% and
5.00%, and will vary monthly with the market.
This APR does not include fees other than interest (unlike the APRs for
traditional mortgages and home equity loans, which include some closing
costs).

Maximum APR

24.99%

Fees (see next page for more fees)
Annual Fee

$50

Total Account Opening Fees

Up to $1,700

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close the line of
credit within three years.

Risks
These terms can change

All of the terms described below are subject to change. If these terms change
(other than the Annual Percentage Rate) and you decide, as a result, not to
enter into an agreement with us, you are entitled to a refund of any fees that you
paid to us or anyone else in connection with your application.

You could lose your home

Your line of credit will be secured by your home, which means that you could
lose your home if you are unable to repay the money you borrowed.

You may not be able to
borrow money

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance
in one payment, and charge you fees upon termination;

�

Refuse to make additional extensions of credit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

If you ask, we will give you specific information about when we can take
these actions.
The interest you pay may not
be tax deductible

AD - 3A –02/07/09

Borrowing and Payoff Periods
Borrowing Period

Payoff Period

2009 – 2018

2019 - 2028

Can I borrow money during
this period?

Yes

Is a monthly payment due
during this period?

Yes

Does my minimum monthly
payment during this period
cover any principal?

No, the minimum payment covers
only the interest owed and will not
decrease your loan balance.

Yes, the minimum payment covers
interest and some principal, but you will
not pay off the entire balance and will owe
a “balloon payment” at the end of the loan
term (see example below).

Minimum Monthly Payment Example for a $10,000 Balance
Minimum Payment during
Borrowing Period

Minimum Payment during
Payoff Period

Final Balloon
Payment

4.00% (minimum under plan)

$33.33

Up to $233.33

$924.96

6.00%

$50.00

Up to $250.00

$926.49

12.00%

$100.00

Up to $300.00

$931.10

24.99% (maximum under plan)

$208.25

Up to $408.25

$941.05

Interest Rate

More Information about Fees
Penalty Fees
Late Payment

Either $15 or 5% of the minimum payment, whichever is greater. This fee is
imposed 15 days after the payment due date.

Over-the-Credit Limit

$20 for each advance from the credit line that causes you to exceed your credit
limit.

Returned Payment

$30

Transaction Fees
Wire Transfer

$20

Courier Service

$30 per transmittal of documents that you request by a delivery service.

Stop Payment

$20 when you request a stop payment on a check written from this account.

Other transaction fees may also apply.

AD - 3A –02/07/09

Credit Line
Credit Limit

Your credit limit will be based on your creditworthiness and other factors.

Minimum Balance

You must keep a minimum balance of at least $500 at all times.

Minimum Loan

The minimum amount that you can borrow at any time is $300.

Minimum Initial Loan

You must borrow at least $10,000 when you open the account.

APR
Annual Percentage Rate
(APR)

4.00% to 9.00% when you open your line of credit, based on your
creditworthiness.
Your APR will be based on the Prime Rate plus a margin between 0.00% and
5.00%, and will vary monthly with the market.
This APR does not include fees other than interest (unlike the APRs for
traditional mortgages and home equity loans, which include some closing
costs).

Maximum APR

24.99%

Fees (see next page for more fees)
Annual Fee

$50

Total Account Opening Fees

Up to $1,700

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close the line of
credit within three years.

Risks
These terms can change

All of the terms described below are subject to change. If these terms change
(other than the Annual Percentage Rate) and you decide, as a result, not to
enter into an agreement with us, you are entitled to a refund of any fees that you
paid to us or anyone else in connection with your application.

You could lose your home

Your line of credit will be secured by your home, which means that you
could lose your home if you are unable to repay the money you
borrowed.

You may not be able to
borrow money

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance
in one payment, and charge you fees upon termination;

�

Refuse to make additional extensions of credit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

If you ask, we will give you specific information about when we can take
these actions.
The interest you pay may not
be tax deductible

Minimum Monthly Payment Amounts for a $50,000 balance
Withdrawal Period

Payoff Period

2009 – 2018

2019 - 2028

Minimum Monthly Payment

4.00% (minimum under plan)

$166.67

Up to $1,166.67

6.00%

$250.00

Up to $1,250.00

12.00%

$500.00

Up to $1,500.00

$1,041.25

Up to $2,041.25

Interest Rate

24.99% (maximum under plan)
Product Features
Are withdrawals allowed
during this period?

Yes

Is a monthly payment due
during this period?

Yes

Does my minimum monthly
payment during this period
cover any principal?

No, this minimum payment covers
only the interest owed and will not
decrease your loan balance.

Yes, the minimum payment covers
interest and some principal.

Will I owe a balloon payment?

If you make only the minimum payments each month you will not pay off the
entire balance and will have to make a “balloon payment”. For example, if you
borrowed $50,000 and made only minimum payments each month, at the end
of the loan you would owe a balloon payment of up to $4,705.

More Information about Fees
Penalty Fees
Late Payment
Over-the-Credit Limit
Returned Payment

Either $15 or 5% of the minimum payment, whichever is greater. This fee is
imposed 15 days after the payment due date.
$20 for each advance from the credit line that causes you to exceed your credit
limit.
$30

Transaction Fees
Wire Transfer

$20

Courier Service

$30 per transmittal of documents that you request by a delivery service.

Stop Payment

$20 when you request a stop payment on a check written from this account.

Other transaction fees may also apply.

AD - 3B –02/07/09

HOME EQUITY LINE OF CREDIT (HELOC) STATEMENT OF TERMS
BORROWER:
COLLATERAL:

Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345

February 7, 2009
ABC Bank
LOAN NUMBER: 123-12-1234-556
DATE:

LENDER:

Credit Line
Credit Limit

$80,000

Minimum Balance

You must keep a minimum balance of at least $500 at all times.

Minimum Loan

The minimum amount that you can borrow at any time is $300.

Minimum Initial Loan

You must borrow at least $10,000 when you open the account.

APR
Annual Percentage Rate
(APR)

4.00% introductory APR for the first six months.
After that, your APR will vary monthly with the market based on the Prime Rate
+ 2.00%. Under this formula, your APR without any discounts would currently
be 6.00% based on today’s Prime Rate.
This APR does not include fees other than interest (unlike the APRs for
traditional mortgages and home equity loans, which include some closing
costs).

Maximum APR

24.99%

Fees (see next page for more fees)
Annual Fee

$50

Total Account Opening Fees

$1,740 (itemized on next page)

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close the line of
credit within three years.

Risks
You could lose your home

Your line of credit is secured by your home, which means that you could lose
your home if you are unable to repay the money you borrowed.

You may not be able to draw
on your line of credit

Under the circumstances described in your account agreement, we can:

The interest you pay may not
be tax deductible

�

Terminate your line, require you to pay the outstanding balance
in one payment, and charge you fees upon termination;

�

Refuse to make additional extensions of credit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

Rights
You do not have to accept this
line of credit

You are under no obligation to accept this line of credit or its terms. Know your
rights before you sign this statement; visit www.frb.gov/consumers/HELOC.htm.

You can dispute transactions

Your right to dispute transactions is specified in your account agreement.
AO - A –02/07/09

Borrowing and Payoff Periods
Borrowing Period

Payoff Period

2009 – 2018

2019 - 2028

Can I borrow money during
this period?

Yes

Is a monthly payment due
during this period?

Yes

Does my minimum monthly
payment during this period
cover any principal?

No, the minimum payment covers
only the interest owed and will not
decrease your loan balance.

Yes, the minimum payment covers
interest and some principal, but you will
not pay off the entire balance and will owe
a “balloon payment” at the end of the loan
term (see example below).

Minimum Monthly Payment Example for a $10,000 Balance
Minimum Payment during
Borrowing Period

Minimum Payment during
Payoff Period

Final Balloon
Payment

4.00% (minimum under plan)

$33.33

Up to $233.33

$924.96

6.00%

$50.00

Up to $250.00

$926.49

12.00%

$100.00

Up to $300.00

$931.10

24.99% (maximum under plan)

$208.25

Up to $408.25

$941.05

Interest Rate

More Information about Fees
Itemized Account Opening Fees
Loan Origination

$350

Loan Discount

$800

Underwriting

$295

Appraisal

$295

Penalty Fees
Late Payment

Either $15 or 5% of the minimum payment, whichever is greater. This fee is
imposed 15 days after the payment due date.

Over-the-Credit Limit

$20 for each advance from the credit line that causes you to exceed your credit
limit.

Returned Payment

$30

Transaction Fees
Wire Transfer

$20

Courier Service

$30 per transmittal of documents that you request by a delivery service.

Stop Payment

$20 when you request a stop payment on a check written from this account.

Other transaction fees may also apply.

AO - A –02/07/09

HOME EQUITY LINE OF CREDIT (HELOC) STATEMENT OF TERMS
BORROWER:
COLLATERAL:

Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345

September 23, 2008
LENDER:
ABC Bank
LOAN NUMBER: 123-12-1234-556
DATE:

Credit Line
Credit Limit

$80,000

Minimum Balance

You must keep a minimum balance of at least $500 at all times.

Minimum Withdrawal

The minimum amount that you can borrow at any time is $300.

Minimum Initial Withdrawal

You must borrow at least $10,000 when you open the account.

APR
Annual Percentage Rate
(APR)

4.00% introductory APR for the first six months.
After that, your APR will be 6.00%. This APR will vary monthly with the
market based on the Prime Rate.
This APR does not include fees other than interest (unlike the APRs for
traditional mortgages and home equity loans, which include some closing
costs).

Maximum APR

24.99%

Fees (see next page for more fees)
Annual Fee

$50

Total Account Opening Fees

$1,740 (itemized on next page)

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close the line of
credit within three years.

Risks
You could lose your home

Your line of credit is secured by your home, which means that you could
lose your home if you are unable to repay the money you borrowed.

You may not be able to draw
on your line of credit

Under the circumstances described in your account agreement, we can:

The interest you pay may not
be tax deductible

�

Terminate your line, require you to pay the outstanding balance
in one payment, and charge you fees upon termination;

�

Refuse to make additional extensions of credit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

Rights
You do not have to accept this
line of credit

You are under no obligation to accept this line of credit or its terms. Know your
rights before you sign this statement; visit www.frb.gov/consumers/HELOC.htm.

You can dispute transactions

Your right to dispute transactions is specified in your account agreement.

AO - B –02/07/09

Minimum Monthly Payment Amounts for a $50,000 balance
Withdrawal Period

Payoff Period

2009 – 2018

2019 - 2028

Minimum Monthly Payment

4.00% (minimum under plan)

$166.67

Up to $1,166.67

6.00%

$250.00

Up to $1,250.00

12.00%

$500.00

Up to $1,500.00

$1,041.25

Up to $2,041.25

Interest Rate

24.99% (maximum under plan)
Product Features
Are withdrawals allowed
during this period?

Yes

Is a monthly payment due
during this period?

Yes

Does my minimum monthly
payment during this period
cover any principal?

No, this minimum payment covers
only the interest owed and will not
decrease your loan balance.

Yes, the minimum payment covers
interest and some principal.

Will I owe a balloon payment?

More Information about Fees
Itemized Account Opening Fees
Loan Origination

$350

Loan Discount

$800

Underwriting

$295

Appraisal

$295

Penalty Fees
Late Payment
Over-the-Credit Limit
Returned Payment

Transaction Fees
Wire Transfer

$20

Courier Service

$30 per transmittal of documents that you request by a delivery service.

Stop Payment

$20 when you request a stop payment on a check written from this account.

Other transaction fees may also apply.

AO - B –02/07/09

FEDERAL RESERVE BOARD CONSUMER PROTECTION RESOURCES

6 Key Questions to Ask About Home Equity Lines of Credit
When you are shopping for a home equity line of credit, you should consider the six questions below. Lines of
credit have risky features that could make it difficult for you to repay your balance. As a result, you could lose your
home. If you are not comfortable with the risks associated with a line of credit, ask your lender about other loan
products, such as a traditional home equity loan. For more information, go to federalreserve.gov/shopwisely.
For a list of counselors in your area, go to www.HELP.gov.

Can my interest rate increase?

1
2

Lines of credit usually have an adjustable interest rate, which means that the rate can increase or
decrease each month. Some lenders offer a discounted interest rate that is fixed for an
introductory period. However, after this introductory period the rate will usually increase.

Can my minimum monthly payment increase?
Yes, your minimum monthly payment can increase. This increase can be based on a number
of factors, such as when your adjustable interest rate increases or you borrow more money.

What is the difference between the “borrowing” and “payoff” periods?

The borrowing period starts when you open your line of credit and lasts for a limited time.
During the borrowing period, you can take out loans from your line of credit, and you may be
required to make a minimum monthly payment. After the borrowing period ends, the payoff
period begins. During the payoff period, you cannot borrow any more money from your line of
credit, and you must make larger minimum payments than during the withdrawal period.

Will I owe a balloon payment?

If you make only the minimum payments each month, you may not pay off your entire balance
by the end of the loan term. At that point, you may be asked to pay the entire remaining balance
as a single lump sum, or “balloon payment.” If you cannot refinance the outstanding balance or
pay it off using your savings, you could lose your home.

Do I have to pay any fees to have a line of credit?

5
6

You may have to pay fees to open your line of credit. You may also be charged an annual fee. In
addition, you may have to pay penalty fees for late or missed payments or if you do not carry a
required minimum balance. You may also be charged an early termination fee if you decide to
pay off or refinance your balance early.

Once I open a line of credit, can my lender change the amount of money
that I can borrow?
If the value of your home declines or if your financial situation changes, your lender can lower
your credit limit or prevent you from borrowing any more money. Keep this in mind as you make
financial plans for the future.

Round 3:
Chicago, IL
March 24-25, 2009






Early Disclosure (ID-1)
Early Disclosure (ID-2)
Account-Opening Disclosure (AO-2)
Historical Example Table
Key Questions Disclosure

HOME EQUITY LINE OF CREDIT (HELOC) STATEMENT of TERMS
BORROWER:
COLLATERAL:

Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345

March 17, 2009
ABC Bank
LOAN NUMBER: 123-12-1234-556
DATE:

LENDER:

The terms described below could change at any time before you open a line of credit with us. If terms other
than the Annual Percentage Rate (APR) change and you decide not to open the account, you are entitled to a refund
of any fees that you paid to us or anyone else in connection with your application.

Risks
You Could Lose Your Home

Your line of credit will be secured by your home, which means that you could lose
your home if you are unable to repay the money you borrowed.

You May Not Be Able To
Borrow From Your Line Of
Credit

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance in
one payment, and charge you fees upon termination;

�

Refuse to make additional extensions of credit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

If you ask, we will give you specific information about when we can take
these actions.
The Interest You Pay May Not
Be Tax-Deductible

If you borrow more than your home is worth, the interest on the excess amount is
not deductible for federal income tax purposes. Consult a tax advisor regarding
the deductibility of interest paid.

Annual Percentage Rate
Annual Percentage Rate
(APR)

5.25% currently. Your APR will vary monthly based on the Prime Rate plus a

Maximum APR

24.99%. The maximum APR could be reached as soon as the first month
that your line of credit is open.

Historical Changes to
Prime Rate

Over the past 15 years, the Prime Rate has varied between 4.25% and
10.00%. If you borrowed $10,000 on this line of credit 15 years ago, your
minimum monthly payment could have varied by $200 a month during that
time.

Comparing APRs

The APR on a HELOC does not include fees other than interest. However,
APRs for traditional mortgages and home equity loans include some fees.

margin of 1.00%. Your monthly statement will tell you each time your APR
changes. There is no limit on how much the APR can change in one year.

Fees
Annual Fee

$50

Total Account Opening Fees

Up to $1,700 (If you ask, we will give you an itemized list)

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close the line of
credit within three years.

Credit Line
Credit Limit

$80,000

Minimum Initial Loan

You must borrow at least $10,000 when you open the account.

Minimum Loan

The minimum amount that you can borrow at any time is $300.

Minimum Balance

You must keep a minimum balance of at least $500 at all times.

ID–1 03/16/09

Borrowing and Repayment Terms
Duration of Line of Credit

20 years consisting of:
� Borrowing Period (Years 1-10): During this time you can borrow money.
� Repayment Period (Years 11-20): During this time you cannot borrow
money.
You must make a minimum monthly payment during both periods.

Balloon Payment

If you make only the minimum monthly payment, you may owe a balloon payment
at the end of the loan. See Payment Plans below for more details.

Payment Plans
Before you open this account you will choose a payment plan. Two choices are described below. Other payment
choices may be available to you; ask us for details.
Plan A

During the borrowing period each month you would pay the interest plus 1.5% of
the principal balance. During the repayment period each month you would pay
enough principal to pay off your entire balance by the end of the loan.

Plan B

During the borrowing period, each month you would pay only interest and your
balance would remain the same. During the repayment period each month you
would pay interest plus 1% of the principal balance, but would owe a balloon
payment at the end of the loan.

Plan A vs. Plan B

With Plan B, you would have lower monthly payments during the borrowing period,
but would owe a balloon payment at the end of the loan. With Plan A, you would
have higher monthly payments than with Plan B, but would not owe any money at
the end of the loan.

Plan Comparison: Sample Payments on a $10,000 Balance
This table shows the payments you would make under each plan if you borrowed $10,000. Because principal
balance and interest owed each month decrease as your principal balance is paid down, some plans show a
payment “decreasing to” a lower payment over time.
Minimum monthly payment during
Borrowing Period

At the current APR of

Minimum monthly payment during
Repayment Period

Final Balloon
Payment

Total of All
Payments

5.25%:

Plan A

$193.75 decreasing to $32.07

$20.72 decreasing to $13.65

$11,963.09

Plan B

$43.75

$143.75 decreasing to $43.47

$2,993.80

$15,321.41

At the maximum APR of

24.99%:

Plan A

$358.25 decreasing to $59.31

$47.55 decreasing to $13.87

$21,983.00

Plan B

$208.25

$308.25 decreasing to $93.22

$2,993.80

$46,586.60

Fixed-Rate Loan Option
You may have an option to borrow up to $40,000 at a fixed interest rate equal to the Prime Rate plus a margin
between 3.00% and 7.00%. Ask us for more details.

ID–1 03/16/09

HOME EQUITY LINE OF CREDIT (HELOC) STATEMENT of TERMS
BORROWER:
COLLATERAL:

Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345

March 17, 2009
ABC Bank
LOAN NUMBER: 123-12-1234-556
DATE:

LENDER:

Annual Percentage Rate
Annual Percentage Rate
(APR)

5.25% currently. Your APR will vary monthly based on the Prime Rate plus a

Maximum APR

24.99%. The maximum APR could be reached as soon as the first month
that your line of credit is open.

Historical Changes to
Prime Rate

Comparing APRs

The APR on a HELOC does not include fees other than interest. However,
APRs for traditional mortgages and home equity loans include some fees.

margin of 1.00%. Your monthly statement will tell you each time your APR
changes. There is no limit on how much the APR can change in one year.

Fees
Annual Fee

$50

Total Account Opening Fees

Up to $1,700 (If you ask, we will give you an itemized list)

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close the line of
credit within three years.

Credit Line
Credit Limit

$80,000

Minimum Initial Loan

You must borrow at least $10,000 when you open the account.

Minimum Loan

The minimum amount that you can borrow at any time is $300.

Minimum Balance

You must keep a minimum balance of at least $500 at all times.

Risks
You Could Lose Your Home

Your line of credit will be secured by your home, which means that you could lose
your home if you are unable to repay the money you borrowed.

You May Not Be Able To
Borrow From Your Line Of
Credit

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance in
one payment, and charge you fees upon termination;

�

Refuse to make additional extensions of credit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

If you ask, we will give you specific information about when we can take
these actions.
The Interest You Pay May Not
Be Tax-Deductible

If you borrow more than your home is worth, the interest on the excess amount is
not deductible for federal income tax purposes. Consult a tax advisor regarding
the deductibility of interest paid.

ID–2 03/17/09

Borrowing and Repayment Terms
Duration of Line of Credit

Balloon Payment

If you make only the minimum monthly payment, you may owe a balloon payment
at the end of the loan. See Payment Plans below for more details.

Payment Plans
Before you open this account you will choose a payment plan. The plans use different formulas for calculating your
minimum payments. Plans with lower monthly payments generally have higher balloon payments due at loan end.
This table shows the formulas for calculating minimum payments for two plans that we offer. Other payment
choices may be available to you; ask us for details.

Plan A

Minimum Payment Formula for
Borrowing Period

Minimum Payment Formula for
Repayment Period

Has a Balloon
Payment?

Interest + 1.5% of principal

Interest + all principal

Plan B

Interest only

Interest + 1% of principal

Yes

Plan Comparison: Sample Payments on a $10,000 Balance
This table shows the payments you would make under each plan if you borrowed $10,000. Because principal
balance and interest owed each month decrease as your principal balance is paid down, some plan periods show a
payment “decreasing to” a lower payment over time.
Plan A
APR

Minimum monthly payment during
Borrowing Period

Minimum monthly payment during
Repayment Period

Final Balloon
Payment

5.25% (current)

$193.75 decreasing to $32.07

$20.72 decreasing to $13.65

24.99% (max.)

$358.25 decreasing to $59.31

$47.55 decreasing to $13.87

APR

Minimum monthly payment during
Borrowing Period

Minimum monthly payment during
Repayment Period

Final Balloon
Payment

5.25% (current)

$43.75

$143.75 decreasing to $43.47

$2,993.80

24.99% (max.)

$208.25

$308.25 decreasing to $93.22

$2,993.80

Plan B

Fixed-Rate Loan Option
You may have an option to borrow up to $40,000 at a fixed interest rate equal to the Prime Rate plus a margin
between 3.00% and 7.00%. Ask us for more details.

ID–2 03/17/09

HOME EQUITY LINE OF CREDIT (HELOC) ACCOUNT-OPENING DISCLOSURE
BORROWER:
COLLATERAL:

Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345

March 17, 2009
ABC Bank
LOAN NUMBER: 123-12-1234-556
DATE:

LENDER:

Annual Percentage Rate
Annual Percentage Rate
(APR)

5.25% currently. Your APR will vary monthly based on the Prime Rate plus a

Maximum APR

24.99%. The maximum APR could be reached as soon as the first month that your
line of credit is open.

Historical Changes to
Prime Rate

Over the past 15 years, the Prime Rate has varied between 4.25% and 10.00%. If
you borrowed $10,000 on this line of credit 15 years ago, your minimum monthly
payment could have varied by $200 a month during that time.

Comparing APRs

The APR on a HELOC does not include fees other than interest. However, APRs for
traditional mortgages and home equity loans include some fees.

Paying Interest

We will begin charging interest on each loan transaction on the date the
transaction is posted to your account.

margin of 1.00%. Your monthly statement will tell you each time your APR changes.
There is no limit on how much the APR can change in one year.

Fees (see below for more fees)
Annual Fee

$50

Total Account Opening Fees

$1,700 (itemized below)

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close the line of credit
within three years.

Credit Line
Credit Limit

$80,000

Minimum Initial Loan

You must borrow at least $10,000 when you open the account.

Minimum Loan

The minimum amount that you can borrow at any time is $300.

Minimum Balance

You must keep a minimum balance of at least $500 at all times.

Borrowing and Repayment Terms
Duration of Line of Credit

20 years consisting of:
� Borrowing Period (Years 1-10): During this time you can borrow money.
� Repayment Period (Years 11-20): During this time you cannot borrow money.
You must make a minimum payment during both periods.

Balloon Payment

If you make only the minimum monthly payment, you will owe a balloon payment at
the end of the loan. See Sample Payments section for more details.

How Your Minimum Payments Will Be Determined
During the borrowing period your minimum monthly payment will cover only interest. If you make only the minimum
monthly payment your balance will remain the same. During the repayment period your minimum payment will cover
interest plus 1% of the principal balance.

Sample Payments
This table shows the payments you would make if you borrowed $10,000 or $80,000 at two sample APRs. During the
repayment period, your minimum monthly payment will decrease over time as your principal balance is paid down.
Minimum payment
during Borrowing Period

Minimum payment
during Repayment Period

(Interest-Only)

(Interest + 1% of Principal)

5.25% (current)

$43.75

$143.75 decreasing to $43.47

$2,993.80

24.99% (max.)

$208.25

$308.25 decreasing to $93.22

$2,993.80

5.25% (current)

$350.00

$1,150.00 decreasing to $347.76

$23,950.40

24.99% (max.)

$1,666.00

$2,466.00 decreasing to $745.76

$23,950.40

APR

Final Balloon
Payment

If you borrow $10,000:

If you borrow $80,000:

AO–2 03/18/09

Fixed-Rate Loan Option
You may have an option to borrow up to $40,000 at a fixed interest rate equal to the Prime Rate plus a margin between
3.00% and 7.00%. Ask us for more details.

More Information about Fees
Itemized Account Opening Fees
Loan Origination

$350

Loan Discount

$800

Underwriting

$295

Appraisal

$295

Penalty Fees
Late Payment

Either $15 or 5% of the minimum payment, whichever is greater. This fee is
imposed 15 days after the payment due date.

Over-the-Credit Limit

$20 for each loan that causes you to exceed your credit limit.

Balance Below $500

$25 if your balance falls below $500.

Returned Payment

$30

Transaction Fees
Wire Transfer

$20 for each loan transaction that you initiate by wire transfer.

Transaction less than $300

4% of each loan transaction that is less than $300. This fee does not apply to
credit card transactions.

Cash advance using a credit card

Either $2 or 2% of the amount of each cash advance, whichever is greater.

Foreign transaction using a credit
card

1% of each transaction in U.S. dollars.

Other fees may also apply; see your account agreement for details.

Risks
You Could Lose Your Home

Your line of credit will be secured by your home, which means that you could
lose your home if you are unable to repay the money you borrowed.

You May Not Be Able To Borrow
From Your Line Of Credit

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance in one
payment, and charge you fees upon termination;

�

Refuse to make additional extensions of credit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

See your account agreement for details.
The Interest You Pay May Not Be
Tax-Deductible

If you borrow more than your home is worth, the interest on the excess amount
is not deductible for federal income tax purposes. Consult a tax advisor
regarding the deductibility of interest paid.

How We Will Calculate Your Balance: We use a method called "average daily balance (including new purchases).”
See your account agreement for more details.
Billing Rights: Information on your rights to dispute transactions and how to exercise those rights is provided in your
account agreement.

AO–2 03/18/09

Historical Example Assuming a $10,000 Balance
Index
Borrowing Period
1991
10.000 %

Margin

Annual Percentage
Rate (APR)

Minimum Monthly
Payment

0.000 %

10.000 %

$ 83.33

1992

6.500 %

0.000 %

6.500 %

$ 54.17

1993

6.000 %

0.000 %

6.000 %

$ 50.00

1994

6.000 %

0.000 %

6.000 %

$ 50.00

1995

8.500 %

0.000 %

8.500 %

$ 70.83

1996

8.500 %

0.000 %

8.500 %

$ 70.83

1997

8.250 %

0.000 %

8.250 %

$ 68.75

1998

8.500 %

0.000 %

8.500 %

$ 70.83

1999

7.750 %

0.000 %

7.750 %

$ 64.58

2000

8.500 %

0.000 %

8.500 %

$ 70.83

Repayment Period
2001
9.000 %

0.000 %

9.000 %

$ 226.13

2002

4.750 %

0.000 %

4.750 %

$ 158.42

2003

4.250 %

0.000 %

4.250 %

$ 129.11

2004

5.250 %

0.000 %

5.250 %

$ 112.52

2005

5.250 %

0.000 %

5.250 %

$ 93.72

Historical Example 3/19/2009

FEDERAL RESERVE BOARD CONSUMER PROTECTION RESOURCES

Key Questions to Ask About Home Equity Lines of Credit
When you are shopping for a home equity line of credit, consider the questions below. Lines of credit
have risky features that could make it difficult for you to repay your balance. As a result, you could lose your
home. Ask your lender about availability and terms of other loan products, such as a traditional home equity
loan. For more information, go to federalreserve.gov/shopwisely. For a list of counselors in your area, go to
www.HELP.gov.

Can my interest rate increase?

1
2

Lines of credit usually have a variable interest rate, which means that the rate can increase or
decrease from time to time. A lender may offer you a discounted interest rate that is fixed for an
introductory period. However, after this introductory period the rate will usually increase.

Can my minimum monthly payment increase?
Yes, your minimum monthly payment can increase based on a number of factors, such as if
your adjustable interest rate increases or you borrow more money.

What is the difference between “borrowing” and “repayment” periods?

The borrowing period starts when you open your line of credit and lasts for a limited time.
During the borrowing period, you can borrow money and may be required to make a minimum
monthly payment. After the borrowing period ends, the repayment period begins. During the
repayment period, you cannot borrow any more money and you must make larger minimum
payments than during the withdrawal period.

Will I owe a balloon payment?

If you make only the minimum monthly payments you may not pay off your entire balance by
the end of the loan term. At that point, you may have to pay the remaining balance as a single
lump sum, known as a “balloon payment.” If you cannot refinance the outstanding balance or
pay it off using your savings, you could lose your home.

Do I have to pay any fees to have a line of credit?

5
6

You may have to pay fees to open your line of credit. You may also be charged an annual or
maintenance fee. In addition, you may have to pay penalty fees for late or missed payments or if
you carry less than the required minimum balance. You may also be charged an early
termination fee if you decide to pay off or refinance your balance early.

Once I open a line of credit, can my lender change the amount of money
that I can borrow?
If the value of your home declines or if your financial situation changes, your lender can lower
your credit limit or prevent you from borrowing more money. Keep this in mind as you make
financial plans for the future.

Round 4:
Denver, CO
April 14-15, 2009





Early Disclosure (ID-3)
Early Disclosure (ID-4)
Account-Opening Disclosure (AO-3)
Key Questions Disclosure

HOME EQUITY LINE OF CREDIT (HELOC) TERMS
BORROWER:
COLLATERAL:

Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345

March 17, 2009
ABC Bank
LOAN NUMBER: 123-12-1234-556
DATE:

LENDER:

You are under no obligation to accept these terms. If you let us know within three (3) business days after
you receive these terms that you decided not to open the account, we will refund all fees you paid.
These terms could change before we open your account. If terms other than the Annual Percentage Rate
(APR) change and you decide not to open the account, let us know and we will refund all fees you paid.

Risks
You Could Lose Your
Home

Your line of credit will be secured by your home, which means that you could lose
your home if you are unable to repay the money you borrow.

You May Not Be Able to
Borrow From Your Line of
Credit

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance in
one payment, and charge you fees upon termination;

�

Not allow you to borrow any additional money even if it is available
under your credit limit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

Information about when we can take these actions will be specified in your
account agreement. You can also ask us for this information.
The Interest You Pay May
Not Be Tax-Deductible

If you borrow more than your home is worth, the interest on the extra amount may
not be deductible for federal income tax purposes. Consult a tax advisor regarding
the deductibility of interest paid.

Annual Percentage Rate
Annual Percentage Rate
(APR)

5.25%.

Maximum APR

24.99%. The maximum rate could be reached as soon as the first month that
your account is open.

Historical Changes to
Prime Rate

Over the past 15 years, the Prime Rate has varied between 4.25% and
10.00%. If you borrowed $10,000 on this line of credit 15 years ago, your
minimum monthly payment would have been as low as $50 and as high as
$250.

This is a variable rate and will vary monthly based on the Prime Rate (as
published in the Wall Street Journal) plus 1.00%. Your monthly statement will tell
you each time your rate changes. There is no limit on how much the rate can
change in one year.

Fees
Annual Fee

$50

Total Account Opening
Fees

Up to $1,740, for the following:

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close your account
within three (3) years.

Other Fees

Other fees will apply, such as fees to make transactions on the account, and
penalty fees. Ask us for a complete list of fees.

�
�
�
�

$350 for loan origination
$800 for loan discount
$295 for underwriting
$200 - $295 for appraisal

Credit Line
Credit Limit

$80,000

Minimum Initial Transaction

You must borrow at least $10,000 when you open the account.

Minimum Transaction

After the initial transaction, each transaction you make must be at least $300

Minimum Balance

You must keep a minimum balance of at least $500.

ID–3 04/08/09

Borrowing and Repayment Terms
Duration of Line of Credit

20 years consisting of:
� Borrowing Period (Years 1-10): During this time you can borrow money.
� Repayment Period (Years 11-20): During this time you cannot borrow money.
You must make a minimum monthly payment during both periods.

Balloon Payment

Depending on the payment plan you choose, if you make only the minimum payment
each month you may not pay off your entire balance by the end of the term. If this
happens, you will be required to pay the remaining balance in a single payment,
known as a “balloon payment.”

Payment Plans
This table shows how we determine minimum monthly payments for two plans that we offer. Other payment choices
may be available; ask us for details.

Plan A

Borrowing Period
Minimum Payment

Repayment Period
Minimum Payment

Interest + 1.5% of principal
(but not less than $50)

Interest + principal
(but not less than $50)

Interest + 1% of principal

Yes

Plan B

Interest only

Has A Final Balloon Payment?

Plan Comparison: Sample Payments on a $10,000 Balance
Your monthly payments will vary each month based on the interest rate and your balance. This table shows the first
monthly payment you will have to make under each plan if you borrow $10,000 when you open your account and do not
borrow any additional money.
Plan A
APR

Borrowing Period
First Payment

Repayment Period
First Payment

Time to pay off balance

5.25% (current)

$193.75

$50.00

15 years

24.99% (max.)

$358.25

$50.00

15 years

APR

Borrowing Period
First Payment

Repayment Period
First Payment

Time to pay off balance

5.25% (current)

$43.75

$143.75

20 years

24.99% (max.)

$208.25

$308.25

20 years

Plan B

Plan A versus Plan B
With Plan A, you will pay less over time and will not owe a balloon payment at the end of the term.
With Plan B, you will pay more over time and will owe a balloon payment of $2,993.80 at the end of the term.

Fixed-Rate Loan Option
Regardless of which payment plan you choose, you have the option to have a fixed interest rate on a balance of up to
$40,000 (of your $80,000 credit line). Ask us for details.

ID–3 04/08/09

HOME EQUITY LINE OF CREDIT (HELOC) TERMS
BORROWER:
COLLATERAL:

Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345

March 17, 2009
ABC Bank
LOAN NUMBER: 123-12-1234-556
DATE:

LENDER:

Risks
You Could Lose Your
Home

Your line of credit will be secured by your home, which means that you could lose
your home if you are unable to repay the money you borrow.

You May Not Be Able to
Borrow From Your Line of
Credit

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance in
one payment, and charge you fees upon termination;

�

Not allow you to borrow any additional money even if it is available
under your credit limit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

Information about when we can take these actions will be specified in your
account agreement. You can also ask us for this information.
The Interest You Pay May
Not Be Tax-Deductible

If you borrow more than your home is worth, the interest on the extra amount may
not be deductible for federal income tax purposes. Consult a tax advisor regarding
the deductibility of interest paid.

Terms May
Change

These terms could change before we open your account. If terms other than the
Annual Percentage Rate (APR) change and you decide not to open the account, let
us know and we will refund all fees you paid.

Annual Percentage Rate
Annual Percentage Rate
(APR)

5.25%.

Maximum APR

24.99%

Historical Changes to
Prime Rate

This is a variable rate and will vary monthly based on the Prime Rate.

Fees
Refundability of Fees

If you let us know within three (3) business days after you receive these
terms that you do not want to open the account, we will refund all fees you
paid.

Annual Fee

$50

Total Account Opening
Fees

Up to $1,740 (If you ask, we will give you an itemized list)

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close your account
within three (3) years.

Credit Line
Credit Limit

$80,000

Minimum Initial Transaction

You must borrow at least $10,000 when you open the account.

Minimum Transaction

After the initial transaction, each transaction you make must be at least $300

Minimum Balance

You must keep a minimum balance of at least $500.

ID–4 04/08/09

Borrowing and Repayment Terms
Duration of Line of Credit

20 years consisting of:
� Borrowing Period (Years 1-10): During this time you can borrow money.
� Repayment Period (Years 11-20): During this time you cannot borrow money.
You must make a minimum monthly payment during both periods.

Balloon Payment

Payment Plans
This table shows how we determine minimum monthly payments for two plans that we offer. Other payment choices
may be available; ask us for details.

Plan A

During the borrowing period, your minimum monthly payment covers interest plus 1.5% of the
principal balance. During the repayment period, your minimum monthly payment covers interest
plus enough principal to pay off your entire balance by the end of the term and you would not owe
a balloon payment. Your payments will never be less than $50.

Plan B

During the borrowing period, your minimum monthly payment covers only interest and you would
not pay down your balance. During the repayment period, your minimum monthly payment covers
interest plus 1% of the principal balance and you would owe a balloon payment at the end of the
term.

First Monthly Payment

5.25% (current)

$193.75

24.99% (max.)

$358.25

APR

First Monthly Payment

5.25% (current)

$43.75

24.99% (max.)

$208.25

Plan B

Fixed-Rate Loan Option
Regardless of which payment plan you choose, you have the option to have a fixed interest rate on an amount up to
your available credit. Ask us for details.

ID–4 04/08/09

HOME EQUITY LINE OF CREDIT (HELOC) TERMS
BORROWER:
COLLATERAL:

Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345

March 27, 2009
ABC Bank
LOAN NUMBER: 123-12-1234-556
DATE:

LENDER:

You are entitled to a refund of any fees that you paid to open this account, if you tell us in writing that you want
to cancel this account for any reason within three (3) business days after you receive these terms.

Annual Percentage Rate
Annual Percentage Rate
(APR)

Maximum APR

24.99%. The maximum rate could be reached as soon as the first month that your
account is open.

Historical Changes to
Prime Rate

Over the past 15 years, the Prime Rate has varied between 4.25% and 10.00%. If
you borrowed $10,000 on this line of credit 15 years ago, your minimum monthly
payment would have been as low as $50 and as high as $250.

Paying Interest

We will begin charging interest on each transaction on the date the
transaction is posted to your account.

5.25%.

Fees (see below for more fees)
Total Account Opening Fees

$1,740 (itemized below)

Annual Fee

$50

Early Termination Fee

.125% of the credit limit or $500, whichever is greater, if you close your account
within three (3) years.

Credit Line
Credit Limit

$80,000

Minimum Initial Transaction

You must borrow at least $10,000 when you open the account.

Minimum Transaction

After the initial transaction, each transaction you make must be at least $300.

Minimum Balance

You must keep a minimum balance of at least $500.

Borrowing and Repayment Terms
Duration of Line of Credit

20 years consisting of:
� Borrowing Period (Years 1-10): During this time you can borrow money.
� Repayment Period (Years 11-20): During this time you cannot borrow money.
You must make a minimum monthly payment during both periods.

Balloon Payment

If you make only the minimum monthly payment you will not pay off your entire
balance by the end of the term and will have to pay the remaining balance in a single
payment, known as a “balloon payment.” See “Sample Payments” on next page for
details.

How Your Minimum Monthly Payments Will Be Determined
During the borrowing period, your minimum monthly payment covers only interest and will not pay down your balance.
During the repayment period, your minimum monthly payment covers interest plus 1% of the principal balance.

Fixed-Rate Option
You have the option to have a fixed interest rate on a balance of up to $40,000 (of your $80,000 credit line). Ask us for
details.

AO–3 04/08/09

Sample Payments
Your monthly payments will vary each month based on the interest rate and your balance. This table shows the first
monthly payment you will have to make if you borrow $10,000 or $80,000 at the current and maximum APRs. You will
owe a balloon payment at the end of the term.
Borrowing Period
First Monthly Payment
(Interest-Only)

Repayment Period
First Monthly Payment
(Interest + 1% of Principal)

5.25% (current)

$43.75

$143.75

24.99% (max.)

$208.25

$308.25

5.25% (current)

$350.00

$1,150.00

24.99% (max.)

$1,666.00

$2,466.00

APR

If you borrow $10,000:

If you borrow $80,000:

More Information about Fees
Itemized Account Opening Fees
Loan Origination

$350

Loan Discount

$800

Underwriting

$295

Appraisal

$295

Penalty Fees
Late Payment

Either $15 or 5% of the minimum monthly payment, whichever is greater.
This fee is charged if your payment is received 15 days after the due date.

Over-the-Credit Limit

$20

Balance below $500

$25 if your balance falls below $500.

Returned Payment

$30

Transaction Fees
Transaction less than $300

4% of each transaction that is less than $300. This fee does not apply to
credit card transactions.

Cash Advance Using a Credit Card

Either $2 or 2% of the amount of each cash advance, whichever is
greater.

Foreign Transaction Using a Credit Card

1% of each transaction in U.S. dollars.

Other fees may also apply; see your account agreement for details.

Risks
You Could Lose Your Home

Your line of credit will be secured by your home, which means that you
could lose your home if you are unable to repay the money you borrow.

You May Not Be Able to Borrow From
Your Line of Credit

Under certain circumstances, we can:
�

Terminate your line, require you to pay the outstanding balance in
one payment, and charge you fees upon termination;

�

Not allow you to borrow additional money even if it is
available under your credit limit;

�

Reduce the credit limit; and

�

Make certain changes in the plan.

See your account agreement for details.
The Interest You Pay May Not Be TaxDeductible

If you borrow more than your home is worth, the interest on the extra
amount may not be deductible for federal income tax purposes. Consult a
tax advisor regarding the deductibility of interest paid.

AO–3 04/08/09

FEDERAL RESERVE BOARD

Key Questions to Ask About Home Equity Lines of Credit
When you are shopping for a home equity line of credit, consider the questions below. Lines of credit
can have risky features that could make it difficult for you to repay your balance. As a result, you could lose
your home. Ask your lender about other loan products, such as a traditional home equity loan. For more
information, go to www.federalreserve.gov/shopwisely.

Can my interest rate increase?

1
2

Lines of credit usually have a variable interest rate, which means that the rate can increase or
decrease from time to time. A lender may offer you a lower initial interest rate for a short time.
However, after this period ends the rate will usually increase.

Can my minimum payment increase?
Yes, your minimum payment can increase based on several factors, such as when your
variable interest rate increases or you borrow more money.

When can I borrow money?

You can borrow money only for a specified time, starting when you open your account. During
this time, known as the “borrowing period,” you can borrow money and you must make
minimum payments. When the borrowing period ends, you will no longer be able to borrow
money from your line of credit.

How soon do I have to pay off my balance?

After the borrowing period ends, under some plans you may be required to pay off your balance
immediately in one payment. Under other plans you will have a certain amount of time to pay
down your balance. During this time, known as the “repayment period,” you will not be able to
borrow additional amounts and will have to make larger minimum payments than during the
borrowing period.

Will I owe a balloon payment?

Under some plans, if you make only the minimum payments you will not pay off your entire
balance by the end of the term. At that point, you will have to pay the remaining balance as a
single lump-sum, known as a “balloon payment.” If you cannot get another loan to repay this
amount, or pay it off using your savings, you could lose your home.

Do I have to pay any fees?

In addition to an application fee, you may be required to pay four (4) types of fees for your line
of credit: (i) fees to open your account, such as loan origination or property appraisal fees;
(ii) fees to maintain your account, such as an annual fee; (iii) fees to use your account, such as a
cash advance fee; and (iv) penalty fees, such as late payment or over-the-credit limit fees.

Round 5:
Bethesda, MD
May 5-6, 2009






Early Disclosure (ID-5)
Early Disclosure (ID-6)
Account-Opening Disclosure (AO-4)
Key Questions Disclosure
“Home Equity Loan vs. Line of Credit”
Disclosure

TRUTH IN LENDING STATEMENT
February 26, 2009
ABC Bank
Loan Officer: 12345 1234
Loan Number: 123-12-1234-556

Joe Smith & Jane Doe
1234 Main Street,
Anytown, ST 12345

You have applied for a home equity line of credit. You should have received with your application “Key Questions to Ask
About Home Equity Lines of Credit,” a disclosure that explains home equity lines of credit. If you did not, ask us for a
copy.
You do not have to accept these terms. These terms could change before we open your account. We will refund
all fees you paid if you tell us that you do not want to open an account:
� for any reason within three business days after you receive this statement; or
� any time before your account is opened if any of these terms (other than the APR) changes.
Risks
You Could Lose Your
Home

Your line of credit will be secured by your home. This means you could lose your home
if you cannot repay the money you borrow.

You May Not Be Able to
Borrow From Your Line of
Credit

Under certain circumstances, we can:
� Terminate your line of credit and make you pay the outstanding balance in one
payment;
� Not allow you to borrow any more money, even if it is available under your credit
limit;
� Lower your credit limit; and
� Make other changes to the plan.
Ask us for more specific information about when we can take these actions.

The Interest You Pay May
Not Be Tax-Deductible

If you borrow more than your home is worth, the interest on the extra amount may not
be deductible for federal income tax purposes. Consult a tax advisor to find out whether
the interest you pay is deductible.

Credit Line
Credit Limit

$80,000

Minimum Initial Transaction

You must borrow at least $10,000 when you open the account.

Minimum Transaction

After the initial transaction, each transaction you make must be at least $300.

Minimum Balance

You must keep a minimum balance of at least $500.

Annual Percentage Rate
Annual Percentage Rate
(APR)

5.25%. This is a variable rate that will change monthly based on the Prime Rate plus
1.00%. Your monthly statement will show your rate changes. There is no limit on how
much the rate can change in one year.

Maximum APR

24.99%. The maximum rate could be reached as soon as the first month that your
account is open.

Historical Changes to
Prime Rate

Over the past 15 years, the Prime Rate has varied between 4.25% and 10.00%. If you
borrowed $10,000 from this line of credit 15 years ago, your minimum monthly payment
would have been as low as $50 and as high as $250.

Fees
Total Account Opening
Fees

Up to $1,740, for the following:
� $350 for loan origination
� $800 for loan discount
� $295 for underwriting
� $200 - $295 for appraisal

Annual Fee

$50

Early Termination Fee

$500 or .125% of the credit limit, whichever is greater, if you close your account within
three years.

Other Fees

Other fees will apply, such as penalty fees and fees to make transactions on the
account. Ask us for a complete list of fees.
ID–5 05/01/09

Borrowing and Repayment Terms
Duration of Line of Credit

20 years, divided into two periods:
� Borrowing Period (Years 1-10): During this time you can borrow money.
� Repayment Period (Years 11-20): During this time you cannot borrow money.
You must make a minimum monthly payment during both periods.

Balloon Payment

Depending on the terms of your payment plan, if you make only the minimum monthly
payment you may not pay off your entire balance by the end of the repayment period. If this
happens, you will have to pay the remaining balance in a single payment, known as a
“balloon payment.”

Payment Plans
This table shows how we determine minimum monthly payments for two plans that we offer. Other payment plans may
be available. Ask us for details.
� Borrowing Period (Years 1-10): Your minimum monthly payment would cover interest
plus 1.5% of the principal balance.

Plan A

� Repayment Period (Years 11-20): Your minimum monthly payment would cover interest
plus enough principal to pay off your entire balance by the end of the repayment period.
You would not owe a balloon payment.
� Borrowing Period (Years 1-10): Your minimum monthly payment would cover only
interest and you would not pay down your principal balance.

Plan B

� Repayment Period (Years 11-20): Your minimum monthly payment would cover interest
plus 1% of the principal balance. You would owe a balloon payment.

Plan Comparison: Sample Payments
The table below shows sample first monthly payments under each plan. These payments are based on the current and
maximum APRs if you borrow $10,000 when you open your account and an additional $10,000 at the end of the
borrowing period.
These are not your actual payments. Your actual payment each month will depend on the amount that you have
borrowed and the interest rate that month.
Sample Payments under Plan A
Borrowing Period (Years 1-10)
First Payment

Repayment Period (Years 11-20)
First Payment

5.25% (current)

$193.75

$121.52

24.99% (max.)

$358.25

$264.51

Borrowing Period (Years 1-10)
First Payment

Repayment Period (Years 11-20)
First Payment

5.25% (current)

$43.75

$287.50

24.99% (max.)

$208.25

$616.50

APR

Sample Payments under Plan B
APR

Plan A vs. Plan B
� Under Plan A, you would pay less over time and would not owe a balloon payment.
� Under Plan B, you would pay more over time and would owe a balloon payment if you make only the minimum
monthly payments. In the example above, the balloon payment would be $5,987.61.

Fixed-Rate Loan Option
During the borrowing period under either payment plan, you have the option to borrow at a fixed interest rate an amount
up to your available credit limit. Ask us for details.

ID–5 05/01/09

TRUTH IN LENDING STATEMENT
February 26, 2009
ABC Bank
Loan Officer: 12345 1234
Loan Number: 123-12-1234-556

Joe Smith & Jane Doe
1234 Main Street,
Anytown, ST 12345

You have applied for a home equity line of credit. You should have received with your application “Key Questions to Ask
About Home Equity Lines of Credit,” a disclosure that explains home equity lines of credit. If you did not, ask us for a
copy.
You do not have to accept these terms. These terms could change before we open your account. You may be
entitled to a refund of all fees you paid if you decide not to open an account. See “Fees” section below for more details.
Credit Line
Credit Limit

$80,000

Minimum Initial Transaction

You must borrow at least $10,000 when you open the account.

Minimum Transaction

After the initial transaction, each transaction you make must be at least $300.

Minimum Balance

You must keep a minimum balance of at least $500.

Annual Percentage Rate
Annual Percentage Rate
(APR)

5.25%.

Maximum APR

24.99%.

This APR will vary with the market based on the Prime Rate.

Fees
Refundability of Fees

We will refund all fees you paid if you tell us that you do not want to open an account:
� for any reason within three business days after you receive this statement; or
� any time before your account is opened if any of these terms (other than the APR)
changes.

Total Account Opening
Fees

Up to $1,740 (if you ask, we will give you an itemized list)

Annual Fee

$50

Early Termination Fee

$500 or .125% of the credit limit, whichever is greater, if you close your account
within three years.

Borrowing and Repayment Terms
Duration of Line of Credit

Balloon Payment

Depending on your payment plan, if you make only the minimum monthly payment you
may not pay off your entire balance by the end of the repayment period. If this
happens, you will have to pay the remaining balance in a single payment, known as a
“balloon payment.”

Fixed-Rate Loan Option
During the borrowing period under either payment plan, you have the option to borrow at a fixed interest rate an
amount up to your available credit limit. Ask us for details.

ID–6 05/01/09

Payment Plans
This table shows how we determine minimum monthly payments for two plans that we offer. Other payment plans
may be available. Ask us for details.
� Borrowing Period (Years 1-10): Your minimum monthly payment would cover interest
plus 1.5% of the principal balance.

Plan A

Plan B

� Repayment Period (Years 11-20): Your minimum monthly payment would cover interest
plus 1% of the principal balance. You would owe a balloon payment.

Plan Comparison: Sample Payments on an $80,000 Balance
The table below shows sample first monthly payments under each plan. These payments are based on the current
and maximum APRs if you borrow $80,000 when you open your account and do not borrow any more money.
These are not your actual payments. Your actual payment each month will depend on the amount that you have
borrowed and the interest rate that month.
Sample Payments under Plan A
Borrowing Period (Years 1-10)
First Payment

Repayment Period (Years 11-20)
First Payment

5.25% (current)

$1,550.00

$139.96

24.99% (max.)

$2,866.00

$296.67

Borrowing Period (Years 1-10)
First Payment

Repayment Period (Years 11-20)
First Payment

5.25% (current)

$350.00

$1,150.00

24.99% (max.)

$1,666.00

$2,466.00

APR

Sample Payments under Plan B
APR

Risks
You Could Lose Your
Home

Your line of credit will be secured by your home. This means you could lose your home if
you cannot repay the money you borrow.

You May Not Be Able
to Borrow From Your
Line of Credit

Under certain circumstances, we can:
� Terminate your line of credit and make you pay the outstanding balance in one
payment;
� Not allow you to borrow any more money, even if it is available under your credit limit;
� Lower your credit limit; and
� Make other changes to the plan.
Ask us for more specific information about when we can take these actions.

The Interest You Pay
May Not Be TaxDeductible

If you borrow more than your home is worth, the interest on the extra amount may not be
deductible for federal income tax purposes. Consult a tax advisor to find out whether the
interest you pay is deductible.

ID–6 05/01/09

TRUTH IN LENDING STATEMENT
February 26, 2009
ABC Bank
Loan Officer: 12345 1234
Loan Number: 123-12-1234-556

Joe Smith & Jane Doe
1234 Main Street,
Anytown, ST 12345

Credit Line
Credit Limit

$80,000

Minimum Initial Transaction

You must borrow at least $10,000 when you open the account.

Minimum Transaction

After the initial transaction, each transaction you make must be at least $300.

Minimum Balance

You must keep a minimum balance of at least $500.

Annual Percentage Rate
Annual Percentage Rate
(APR)

5.25%. This is a variable rate that will change monthly based on the Prime Rate
plus 1.00%. Your monthly statement will show your rate changes. There is no limit
on how much the rate can change in one year.

Maximum APR

24.99%. The maximum rate could be reached as soon as the first month that your
account is open.

Fees
Total Account Opening Fees

$1,740 (itemized below)

Annual Fee

$50

Early Termination Fee

$500 or .125% of the credit limit, whichever is greater, if you close your account
within three years.

Other Fees

See below.

Borrowing and Repayment Terms
Duration of Line of Credit

Balloon Payment

If you make only the minimum payment each month you will not pay off your entire
balance by the end of the repayment period. In this case, you will have to pay the
remaining balance in a single payment, known as a “balloon payment.” See “Sample
Payments” below for details.

How Your Minimum Monthly Payments Will Be Determined
� Borrowing Period (Years 1-10): Your minimum monthly payment covers only interest and will not pay down
your principal balance.
� Repayment Period (Years 11-20): Your minimum monthly payment covers interest plus 1% of the principal
balance.

Sample Payments
The table below shows sample first monthly payments. These sample payments are based on the current and
maximum APRs if you borrow $80,000 when you open your account and do not borrow any more money over time.
You will owe a balloon payment of $23,950.43 if you make only minimum monthly payments.
These are not your actual payments. Your actual payment each month will depend on the amount that you have
borrowed and the interest rate that month.
Borrowing Period (Years 1-10)
First Payment

Repayment Period (Years 11-20)
First Payment

5.25% (current)

$350.00

$1,150.00

24.99% (max.)

$1,666.00

$2,466.00

APR

AO–4 05/01/09

More Information about Fees
Itemized Account Opening Fees
� Loan Origination

$350

� Loan Discount

$800

� Underwriting

$295

� Appraisal

$295

Penalty Fees
� Late Payment

Either $15 or 5% of the minimum monthly payment, whichever is greater.
This fee is charged if your payment is received 15 days after the due date.

� Over-the-Credit Limit

$20

� Balance below $500

$25 if your balance falls below $500.

� Returned Payment

$30

Transaction Fees
� Transaction less than $300

4% of each transaction that is less than $300. This fee does not apply to
credit card transactions.

� Cash Advance Using a Credit Card

Either $2 or 2% of the amount of each cash advance, whichever is greater.

� Foreign Transaction Using a Credit
Card

1% of each transaction in U.S. dollars.

Other fees may also apply; see your account agreement for details.
Risks
You Could Lose Your Home

Your line of credit will be secured by your home. This means you could
lose your home if you cannot repay the money you borrow.

You May Not Be Able to Borrow From
Your Line of Credit

Under certain circumstances, we can:
� Terminate your line of credit and make you pay the outstanding balance
in one payment;
� Not allow you to borrow any more money, even if it is available under
your credit limit;
� Lower your credit limit; and
� Make other changes to the plan.
See your account agreement for details.

The Interest You Pay May Not Be TaxDeductible

If you borrow more than your home is worth, the interest on the extra
amount may not be deductible for federal income tax purposes. Consult a
tax advisor to find out whether the interest you pay is deductible.

Fixed-Rate Option
During the borrowing period, you have the option to borrow at a fixed interest rate an amount up to your available
credit limit. Ask us for details.
How We Will Calculate Your Balance: We use a method called "average daily balance (including new purchases).”
See your account agreement for more details.
Paying Interest: We will begin charging interest on each transaction on the date the transaction is posted to your
account.
Billing Rights: Information on your rights to dispute transactions and how to exercise those rights is provided in your
account agreement.

AO–4 05/01/09

FEDERAL RESERVE BOARD

Key Questions to Ask About Home Equity Lines of Credit
When you are shopping for a home equity line of credit, consider the questions below.
Lines of credit can have risky features that could make it difficult for you to repay your balance.
As a result, you could lose your home. Ask your lender about other loan products, such as a
traditional home equity loan. For more information, go to www.federalreserve.gov/shopwisely.

Can my interest rate increase?

1
2

Can my minimum payment increase?
Yes, your minimum payment can increase based on several factors, such as when your
variable interest rate increases or you borrow more money.

When can I borrow money?

How soon do I have to pay off my balance?

Will I owe a balloon payment?

Do I have to pay any fees?

Should I get a home equity loan instead of a line of credit?

With a home equity loan, you can borrow a fixed amount of money at a fixed interest rate. This
means that your interest rate and minimum payment will stay the same over time. Consider a
home equity loan if you plan to borrow a fixed amount of money at one time and want to know
the exact amount of your minimum payment. Consider a home equity line of credit if you plan
to borrow different amounts of money over time and can afford higher payments, even if the
interest rate on your line of credit reaches its maximum.

FEDERAL RESERVE BOARD CONSUMER PROTECTION RESOURCES

Home Equity Loan vs. Line of Credit
Which Home Equity Product is Right for You?
If you are looking for a loan and have equity in your home, there are at least two types of
credit that may be available to you: a home equity loan and a home equity line of credit. If
you are considering either of these products, be sure you understand the differences
between them.

Home Equity Loan

Home Equity Line of Credit

How it works:

You borrow a fixed amount of money and
pay it back over time. Home equity loans
usually have a fixed interest rate. This
means that your interest rate and monthly
payment stay the same over time.

You can borrow different amounts of
money over time up to your available
credit limit. Home equity lines of credit
usually have a variable interest rate, which
means that your interest rate and monthly
payment can change even if you don’t
borrow more money.

Consider a home equity loan if:

Consider a home equity line of credit if:

�

You plan to borrow a fixed amount of
money and no additional money later;
and

�

You like to be able to borrow different
amounts of money when you need it
(up to your available credit limit); and

�

You like paying the same amount each
month or might have trouble affording
monthly payments that increase.

�

You can afford higher monthly
payments, even if the interest rate
goes up to its maximum.

If you are considering a variable-rate home equity line of credit, remember that
you may not be able to refinance into a fixed-rate home equity loan before your
interest rate and monthly payment increase. You might not qualify for refinancing
if the market value of your home goes down or your financial situation changes.

Where to Find Help
For more information about choosing between a home equity loan and a home equity
line of credit, or for a list of licensed housing counselors in your area who can help
you decide, visit www.frb.gov.

H vs. L 5/1/09

Full text of District Notices (Federal Reserve Bank of Dallas) : Board Proposes Significant Changes to Regulation Z (Truth in Lending), Notice 09-48 : Summary of Findings

FRASER