Wednesday, September 3, 2008

Shutting down those HELOCs

During the Great Housing Bubble HELOCs were all the rage. It was almost like free money - your house was providing a second income. When the bills came due people could just refinance and put those bills off for years. But with the bust that money is no longer available. This article from the South Jersey Courier-Post titled Drop in housing values affect home equity loans discusses the near universal shut down of HELOC lines that have accompanied the housing bust.

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.

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.

"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 housing prices rose, people began to lean on this line of credit too heavily. For too many people, their home's equity was just too tempting not to touch. They used this debt to pay off other debt such as a car loan. They used it to invest in a business, take vacations or pay for college expenses.

As we discussed here and here lenders have to take care in how they shut down HELOCs. They can not just red line areas that have falling home prices. There are procedures that must be followed.

The lenders are in a tight spot - either shut down HELOCs and potentially face lawsuits or leave them open and potentially lose all that money. A tough choice that resulted from past careless decisions.

No comments: