Home Equity Lines of Credit Consumer Protection and Risk Management Considerations When Changing Credit Limits and Suggested Best Practices
FIL-58-2008 June 26, 2008
The FDIC is issuing the attached supervisory guidance 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. In addition, the FDIC urges institutions to work with borrowers to minimize hardships that may result from such reductions or suspensions.
In response to falling home prices and borrower financial difficulties, some financial institutions have reduced or suspended home equity lines of credit (HELOCs) and other institutions may be considering doing this.
Such actions may be prudent and appropriate ways for institutions to manage credit risk, as articulated more fully in existing supervisory guidance. However, certain legal requirements designed to protect consumers must be followed.
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.
The FDIC urges institutions to work with existing borrowers, when possible, to mitigate financial hardships arising from HELOC reductions or suspensions.
FDIC-Supervised Banks (Commercial and Savings)