The Veridian Blog

As the country’s credit crisis has spiraled out of control, lenders have cut back or even cancelled home equity lines of credit (HELOCs).  HELOCs let homeowners borrow extra money, up to a pre-arranged limit in a similar fashion as that of credit cards.  The loans, which can be tapped when needed, are backed by people's homes, so the interest rate is lower than other unsecured sources such as credit cards.  As home values have dropped, however, lenders have accordingly decreased their exposure to potential losses by cutting back homeowners’ unused funds. 

Is this legal?  There are certainly laws pertaining to this and consumers do have rights.

Under Regulation Z, which implements the Truth-in-Lending Act, lenders are generally prohibited from closing a credit line and accelerating repayment of the outstanding balance.  Furthermore, lenders are required to reinstate credit lines when that reason for the reduction no longer exists.  The main exceptions to Regulation Z include borrower fraud (lying on the application) or borrower default on their repayment obligations.  But a third exception – when actions adversely affect the property pledged as collateral or the creditor’s security interest in the property – is somewhat more ambiguous and is worth exploring in detail by borrowers who think they’ve been treated unfairly. 

Basically, there has to be a reason – fraud, default, lowered value or unmaintained property – for the lender to reduce a HELOC.  According to recent guidance issued by two federal agencies – the Federal Deposit Insurance Corporation in June and the Office of Thrift Supervision (“OTS”) in August – a lender can freeze or reduce a HELOC account when the value of collateral declines significantly below the appraised value.  The problem, though, is that the term “significant decline” is not defined within the regulation.  The OTS says it depends on individual circumstances. 

If you believe your HELOC reduction is unwarranted, then contact your lender, get the reason for the reduction and ask how they determined value if value is the issue.  Often, homeowners can rebut with an appraisal of their own to support their claim that the lender’s collateral is worth more.