After a rash of consumer complaints, the federal agency charged with regulating savings and loan institutions this week warned lenders they could not arbitrarily change the terms of home equity loans.
The Office of Thrift Supervision issued a six-page letter of guidance to the institutions, called thrifts, spelling out their obligations on home equity lines of credit, better known as HELOCs.
These revolving lines of credit were popular during the housing boom of 2001 to 2005, when people could easily borrow against the equity in their homes to pay for college tuition, build a garage or remodel a kitchen.
Equity is the home's market value minus the outstanding loan balance.
Now a national housing slump is into its second year with no end in sight. Many borrowers own homes worth less than the value of their loan, and home equity lenders are tightening up amid rising defaults.
As national housing problems worsened, complaints to the OTS grew that some of the 830 thrifts under its supervision were freezing the credit promised to borrowers and altering rules for accounts that weren't supposed to be changed.
“There's an uptick in complaints, written and by telephone,” William Ruberry, an OTS spokesman, said in an interview.
Given the rise in complaints, the OTS guidance serves as a warning shot by regulators.
“We just wanted to give our institutions a heads-up that our examiners are going to be focusing on this area,” Ruberry said.
Specifically, the OTS guidance reminds thrifts that they can freeze promised credit under approved circumstances such as a substantial loss in value of the underlying property.
But any reduction of a borrower's credit limit below the outstanding balance cannot require the borrower to make a higher payment.
And given that entire neighborhoods in hard-hit states such as California, Arizona and Florida are at risk of widespread foreclosure because of steep drops in home values, thrifts were reminded they cannot freeze home equity lines for broad geographic areas.
Instead they must weigh each loan individually to determine when there has been a “significant decline” in the value of the collateral, the home. That “significant” decline is generally viewed as a 50 percent drop in the home price from the time when the home equity line of credit was offered.
The thrift supervisor also told lenders they cannot charge a fee for restoring the credit once the condition leading to the freeze has been determined to have been fixed.
The Federal Deposit Insurance Corp., which insures deposits and regulates about half of the nation's state and federally chartered banks, warned in an Aug. 21 newsletter about lenders refusing to extend loans to existing customers who are making their payments on time.
“Reducing or freezing credit lines may be a prudent response for lenders managing their risks,” said Mindy West, a chief in the FDIC's division of consumer protection, said in the newsletter. “But for consumers who use home equity lines to pay for major purchases or to pay off higher-priced credit, having their source of funding reduced can result in significant financial hardship.”
The FDIC has a hotline for consumers who are concerned about the practice of their lender, 877-ASK-FDIC. The OTS has a similar hot line, 800-842-6929.