Some 122,000 borrowers with Countrywide home-equity lines of credit, or HELOCs, received letters in January informing them that they could no longer withdraw funds from their lines. A few months later, thousands of customers of other major lenders -- including Bank of America, J.P. Morgan Chase, Citibank, SunTrust, USAA, Wachovia, Washington Mutual and Wells Fargo -- also received notice that their lines had been frozen or reduced.
And how are the banks determining which lines are closed? That will be a key issue going forward. This is what Washington Post was able to find out -
Lenders uniformly cite their right, as disclosed in HELOC contracts, to reduce or suspend a borrower's line of credit if home values fall significantly or if the ability to repay the loan is in jeopardy. Beyond that, they won't say much. Home-equity executives from five banks we contacted were unavailable for interviews for this report.They would be crazy to comment on anything. Suspending and reducing HELOC are supposed to be done on a case by case basis. However there are reports that there are blanket closeouts in neighborhoods across the board. The advice is for people to get there own appraisal and then show that they still have existing equity available to have the lines re-instated. There are obviously many cases where the banks are 100% correct in pulling the lines.
Here are two of the highlights that HELOC lenders were given recently in a summary if an FDIC letter (full letter here) regarding closing lines -
- Regulation Z, implementing the Truth in Lending Act, permits lenders to reduce the credit limit or suspend further extensions of credit if the value of the dwelling securing the loan declines significantly, or if a consumer is likely to be unable to meet his or her obligations as a result of a material change in his or her financial circumstances.
- Compliance with Regulation B and the Fair Housing Act requires lenders to calculate revised property values and determine borrower financial circumstances using consistently applied fact- based methods, and implement any resulting limitations without regard to prohibited factors.
While is likely that some of the lenders followed the practices accordingly, there seems to be strong evidence that lenders were just cutting equity lines across the board for their own financial stability. As noted in the title - evidence of unfairly cut HELOCs could easily allow individual and class action lawsuits. We wonder if any enterprising lawyers or any spurned individuals are taking a look at this.
The FDIC said it issued the letter to “remind FDIC-supervised financial institutions that if, for risk management purposes, they decide to reduce or suspend home equity lines of credit, certain legal requirements designed to protect consumers must be followed.”