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It Pays To Know Your Lending Rights

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The Tampa Tribune

Published: September 7, 2008

An increase in consumer complaints over the cancellation or reduction of home equity lines of credit has prompted one federal banking regulator to remind financial institutions about the laws governing this type of loan.

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.

"We just wanted to give our institutions a heads up that our examiners will be focusing on how the institutions are handling cutbacks in home equity lines of credit," OTS spokesman William Ruberry said.

For example, with limited exceptions, the Truth in Lending Act prohibits creditors from terminating a home equity line of credit and then accelerating repayment of the outstanding balance.

Additionally, 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.

Blanket Reductions Break Law

A suspension or reduction of a home equity line must be based on an assessment of the value of "the dwelling that secures the plan," the OTS said in its letter of guidance to the institutions. Consequently, a financial institution would violate the law if it attempted to yank credit limits of all home equity credit line accounts in a geographic area where real estate values are declining.

"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 the value for many homes throughout the country remains in a freefall, many lenders have snatched or significantly reduced customers' home equity lines of credit. In its first quarter earnings release, Wachovia reported a home equity lending decline of 41 percent.

Just recently the Standard & Poor's/Case-Shiller Home Price Indices reported record broad-based declines in the prices of existing single family homes. Because a borrower's home serves as collateral for a home equity line of credit, a drop in its value puts the loan at risk.

As a result of declining home values, a lot of owners owe more on their homes than they are worth. If the homeowner is forced to sell or the home goes into foreclosure, the home equity lender can't reasonably expect to collect any money because the primary mortgage holder gets paid first.

Kudos to the OTS for reminding lenders that they shouldn't trounce on consumer rights.

Even if your financial institution isn't a thrift, it's worth reviewing the OTS guidance letter. For information about the laws governing home equity lines of credit, go to www.ots.treas.gov. Look for the OTS notice under "News & Events."

It's Not A Credit Card

I'll also say this. Certainly financial institutions should follow the law, but I don't feel sorry for consumers whose lines of credit have been reduced or suspended.

For years, homeowners have used the value in their homes as a source of cash when they should have been using savings. They turned to home equity lines of credit like it was a credit card.

Compared to other consumer debt, the cost of a home equity line of credit does appear cheaper. And people tell themselves it's a better way to borrow because the interest paid on this debt is tax deductible.

Unfortunately, a lot of people are learning the true cost of this credit. They now know that this type of loan can be a debt trap.

Michelle Singletary can be reached at The Washington Post, 1150 15th St. N.W., Washington DC 20071.

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