Home Equity Loans: Banks overzealous on cuts

When it comes to residential property in the US, banks were overzealous on the way up and now they are overzealous on the way down. You have probably heard that banks are cutting HELOCs (home equity lines of credit) like mad. Borrowers, looking to tap an additional source of liquidity as the U.S. economy softens, are often finding that that liquidity is not there.

The regulators are now looking to step in to this situation and remind lenders of their responsibility in having made these lines of credit in the first place. Will home owners be forced to tap their HELOCs before they get cut just to be sure that liquidity is there?

It should not have to come to this; Lenders are merely exploiting the fall in house prices in order to cut down on their residential property exposure and reduce their capital tied up in HELOCs. Regulators need to take a firm hand in this and stop the abuses by lenders.

Here is a snippet of what the Washington Post says about this issue. A link to the full article is below.

An increase in consumer complaints over the cancellation or reduction of home equity lines of credit has prompted one federal banking regulator to remind financial institutions about the laws governing this type of loan.

The Office of Thrift Supervision, which supervises savings associations and their holding companies, has warned institutions that if they curtail or terminate a home equity line of credit, the action must comply with federal laws and rules designed to protect customers, including regulations covered in the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act and the OTS nondiscrimination rule.

“We just wanted to give our institutions a heads-up that our examiners will be focusing on how the institutions are handling cutbacks in home equity lines of credit,” said OTS spokesman William Ruberry.

For example, with limited exceptions, Regulation Z of the Truth in Lending Act prohibits creditors from terminating a home equity line of credit and then accelerating repayment of the outstanding balance. Exceptions include situations in which the borrower fraudulently got the loan or failed to repay according to the terms of the loan.

Additionally, under Regulation Z, a lender can’t just reduce or suspend access to a line of credit without cause, said Montrice Godard Yakimov, managing director for compliance and consumer protection for the OTS.

A suspension or reduction of a home equity line must be based on an assessment of the value of “the dwelling that secures the plan,” the OTS said in its letter of guidance to the institutions. Consequently, a financial institution would violate the law if it attempted to yank credit limits of all home equity credit line accounts in a geographic area where real estate values are generally declining.

“There are clearly rules that apply when an institution wants to suspend or reduce an equity line of credit,” Godard Yakimov said. “Our goal in issuing the guidance was to bring all those rules together in one place.”

As the value of many homes throughout the country remains in a free-fall, many lenders have snatched back or significantly reduced customers’ home equity lines of credit.

Source
A Wake-Up Call on Home Equity Loans – Washington Post

3 Comments
  1. Anonymous says

    HELOC stands for Home Equity Line of Credit, right? So if you’ve got no home equity due to falling prices, the LOC bit disappears. Also, it’s not a loan it’s a maximum limit. It can still be pulled.

    Perhaps you don’t mean to say it, but your phrasing makes it sound like these homedebtors have a right to loans rather than it being a freely entered contract.

    Nick

  2. Edward Harrison says

    Nick,

    I see the validity in your view — that’s why these credit lines are getting pulled. The fine print in the contracts probably say they can do that. But, “Regulation Z of the Truth in Lending Act prohibits creditors from terminating a home equity line of credit and then accelerating repayment of the outstanding balance.”

    Moreover, we aren’t just talking about people with zero equity in their home. Say you bought a place in 1993 at $150,000. Today, it could still be worth $300,000 even though prices ma have collapsed by 30% in your area. With 15 years left on your mortgage and more than $200,000 in equity, it is criminal that a bank could pull that HELOC. But, that is what is happening.

    Pull HELOCs on houses hat are underwater. Heck, pull them on houses that have less than 10% equity. But, the banks are using general price declines to reduce all exposure to certain markets. They got themselves in this mess by over-lending, they darn well should keep those HELOCs open.

    It’s this kind of panic move that reduces credit to creditworthy individuals and further inhibits future economic growth.

    Edward

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