Government Warns Banks: HELOC Reductions Must Comply With Federal Law

The US government’s Office of Thrift Supervision, which regulates the behavior of banks and other savings organizations, has issued a warning earlier today to America’s financial institutions. When banks decrease the amount of home equity-secured credit they offer their customers–or when they cancel customers’ access to home equity lines of credit (HELOCs) altogether–the customers are protected under a number of federal laws. These laws include the Truth in Lending Act, the Fair Housing Act, and the Equal Credit Opportunity Act.

Home equity lines of credit essentially work like a credit card, where the customer can continuously borrow money as needed (up to their credit limit), and repay it as needed. As with credit cards, the interest rate on their debt constitutes their “minimum payment.” Unlike with a credit card, however, the customer’s debt is secured through their home equity.

Due to the uncertain value of homes in the wake of this year’s housing crisis, many banks have significantly reduced their customers’ available home equity lines of credit, or denied customers this type of credit altogether.

Now, the Office of Thrift Supervision wishes to “give institutions a heads-up that our examiners will be focusing on how the institutions are handling cutbacks in home equity lines of credit,” in the words of OTS representative William Ruberry.

One possible violation? Banks are generally not allowed to demand that customers speed up the rates at which they repay the existing debts on their home equity lines, once they’ve decided to cancel that customer’s home equity line.

Additionally, banks must give a good reason for suspending customers’ home equity lines. If the customer has made all of his or her payments as per the terms of his or her initial agreement with the bank, then the bank must prove that the customer’s home has measurably declined in value. Thus, for example, banks can’t cancel the HELOCs of all homeowners who reside in a region where the price of real estate has decreased as a whole. Instead, banks must justify their decisions on a customer-by-customer basis.

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