Q: My husband and I have a home equity line of credit with a perfect payment history. Our bank turned off our access to draw any further amounts. When I called them, they stated that the home values have decreased in our area, as an explanation for taking away the line of credit. I explained that we are in the middle of a remodeling project and the draw access was necessary to finish (major kitchen gutting and rebuild). Can our bank take away our line of credit?
A:For those who don’t know, a home equity line of credit, or HELOC, is a form of revolving credit. It’s much like a credit card, except your home serves as collateral for this debt.
Because home values have been dropping in many parts of the country, many people owe more on their house than it is worth. As a result of this crisis, many lending institutions are scared they may lose more money on bad loans and have been yanking people’s home equity lines of credit.
Under certain circumstances, it is legal for the bank to reduce or even cancel your home equity line of credit.
In response to consumer questions and complaints, the Office of Thrift Supervision (OTS) recently issued guidance on home equity lines of credit, warning the institutions that it supervises to follow the law when reducing or snatching people’s credit line.
The OTS supervises savings associations and their holding companies. In its directive, the OTS cautioned lending institutions that terminating a home equity line of credit must comply with federal laws and rules designed to protect customers, including regulations covered in the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act and the OTS nondiscrimination rule.
For example, under Regulation Z, a lender can’t arbitrarily reduce or suspend access to a line of credit without cause. The OTS lists the following reasons a lender can take away a line of credit in its guidance (check out the OTS document, “Home Equity Line of Credit Account Management Guidance” [PDF]):
- If a borrower has committed fraud.
- If a borrower fails to meet repayment terms for any outstanding balance.
- If a borrower’s actions adversely affect the property pledged as security for the line of credit.
Here’s an example of how a bank could reduce your line of credit. Assume that a house with a first mortgage of $50,000 is appraised at $100,000, and a $30,000 HELOC account is opened. The difference between the HELOC limit and available equity is $20,000, half of which is $10,000. The creditor could prohibit further advances or reduce the credit limit if the value of the property declines by $10,000 (from $100,000 to $90,000).
For more information about HELOCs, see the Federal Reserve Board’s, “What You Should Know about Home Equity Lines of Credit.” Once there, click on the link “What if the lender freezes or reduces your line of credit?”
If your line of credit is reduced or terminated, contact your lender and find out if there is anything you can do to restore it.
But before you contact the lender, or become too irate that your line has been snatched or reduced, consider if you need the debt at all. For example, instead of borrowing for a home improvement project, use your savings. And if you don’t have savings, wait and save for the project.
Just consider all the homeowners struggling under unmanageable home equity debt. Use that as motivation to pay for what you want with cash rather than debt.