Wednesday, July 2, 2008

HELOC Lock Down Update

We have posted regularly about HELOCs getting shut down completely or reduced. For example, our posts about it can be found here and here and here. Today Housing Wire via Calculated Risk informs us the following -

The [Wall Street] Journal story suggested that banks are moving to freeze HELOCs globally, and then evaluating available credit later on a case-by-case, property-by-property basis — sort of a shoot first, ask questions later approach to managing risk that has left an increasing number of homeowners out in the cold as they contest banks’ decisions to reel in their available credit.

The FDIC letter warned banks that such a shotgun-style approach to freezing HELOCs
might violate Truth-in-Lending regulations; under Regulation Z, lenders can reduce an applicable credit limit only in the event of “significant decline” to the value of an individual property (a “material change” in the borrower’s financial condition — such as the loss of a job — qualifies as well).

The FDIC said the Federal Reserve has defined a “significant decline” to mean situations where the unencumbered equity in a property is reduced by 50 percent or more, the FDIC said.

“It’s pretty clear that banking regulators are warning insured banks against taking global actions to restrict credit without having done their due diligence up front,” said one source, a banking executive that asked not to be named in this story. “Don’t cut corners is the message here.”

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.”

Here is the original warning letter from the FDIC.

Sounds like a pretty stern warning. Now we have to wait and see what happens. Will they enforce this from this day forward or will they have to re-open all the closed lines? We will be watching...

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