HELOC lenders are now realizing that they were overly enthusiastic about approving big credit lines for borrowers. As they try to reduce their risk exposure, some homeowners are getting a surprise notification that their HELOC has been cancelled.
"She could take it back, she might take it back some day." It was long before the home equity debt boom that Pink Floyd sang those lyrics, but they still echo the concerns of some homeowners today. How will you be affected if your lender takes back your approved home equity line of credit (HELOC)?
It's really happening out there: lenders are notifying HELOC customers that their lines of credit have been reduced, or even cancelled. The trend has been noticeable enough to spark the attention of the Office of Thrift Supervision (OTS), the agency that regulates federally chartered savings institutions. The OTS recently addressed the issue by reminding its member institutions of the legalities involved in how and why a customer's HELOC can be modified.
Playing by the rules
The practice of cancelling or reducing a home equity line of credit without cause is generally banned by Regulation Z of the Truth in Lending Act (TILA). While lenders may have reasons why they want to reign in their exposure to home equity debt, not all of those reasons are legally justifiable. It's not acceptable, for instance, to rescind credit as part of a general effort to reduce risk. Lenders might be inclined to freeze all HELOCs in California, where property values are faltering-but that type of sweeping action is illegal.
HELOC modifications are allowed when the lender has a borrower- or collateral-specific reason for making the change. Examples include:
- Evidence that the borrower obtained the HELOC fraudulently
- Documentation that the HELOC payments have not been paid on time and in accordance with the agreement
- Documentation that the value of the collateral property (and therefore the home equity) has declined significantly
This last factor is one that will cause the most problems for homeowners. Properties around the country are experiencing huge value declines as the real estate sector continues to stumble through a transition period.
Keeping tabs on home equity
Borrowers who are concerned about the status of their HELOCs should periodically obtain free, online home valuation estimates. That estimate would indicate that the home is worth significantly less than it was when the home equity line of credit was approved, and the homeowner might be a target for a HELOC reduction-even if the payments have always been made on time.
Lenders that enforce a HELOC reduction aren't allowed to force the borrower to make a higher payment as a result.
Other than paying your bills on time, there isn't much you can do to head off a HELOC rescission. Your best bet is to comb over your finances, and make a plan in case it happen to you. Once you've done that, you're free to pop in your headphones and relax to your favorite Pink Floyd tunes.