Tips for Trying to Fix a Clogged or "Frozen" Home Equity Line
For years, homeowners have turned to home equity lines of credit (HELOCs) as a way to borrow against their home's value to pay for college tuition, home improvements, medical bills and other major expenses. (A home's equity is the market value minus what is owed on the mortgage. If you owe $100,000 on your mortgage but your home is worth $250,000, your equity is $150,000.)
But now, with home values dropping, the collateral securing individual HELOCs is worth significantly less, and many lenders are responding by reducing the amount that can be borrowed or by "freezing" (suspending) access to these loans entirely, even for people who have been making their loan payments on time.
"Reducing or freezing credit lines may be a prudent response for lenders managing their risks," said Mindy West, Chief of Policy and Program and Development in the FDIC's Division of Supervision and Consumer Protection. "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."
What can you do if your home equity line has been reduced or frozen?
Contact your lender if you're facing a major cash shortage as a result of its decision. The FDIC has urged the banks we supervise to work with customers who may experience financial hardship or significant inconvenience as a result of a reduction or suspension of their credit limits. For example, a borrower relying on a line of credit to fund a home renovation or make a college tuition payment may need some quick assistance finding an alternate source of financing.
"We have told banks that, depending on a borrower's creditworthiness and overall financial circumstances, it may be possible to offer alternative types of credit or other arrangements that can minimize the negative effects of credit-line reductions or suspensions," added Luke Brown, FDIC Associate Director for Compliance Policy.
Ask the bank to reconsider if your home's value has declined less than other properties in your area. If, for example, the lender's decision relied heavily on information about property sales for your city, but your home's value has held up better than the average - and you can back that up, perhaps by paying for a new, independent appraisal of your home - you may be able to get the lender to reconsider. Be aware, however, that your appeal might not be successful.
Make sure your home equity lender knows if you have significantly reduced the balance on your first mortgage. If you made larger-thanusual payments on your first mortgage, you may be a lower risk to your home equity lender, who may not be aware of that development.
Shop around for a new line of credit, but be prepared for a challenge. You may find a lender willing to provide an attractive HELOC based on your credit rating and the equity you've built up in your home, but that could take longer than in the past, especially with mortgage foreclosures rising and real estate values falling in many areas.
Remember that home equity borrowers have rights under federal laws and rules. In particular, the Truth in Lending Act permits a lender to reduce or suspend a consumer's credit limit if there's been a significant decline in property value or a material change in the borrower's financial circumstances (such as a significant decrease in income). However, the law also requires the lender to provide written notice to each borrower not later than three business days after the action is taken and to include specific reasons for the action. The letter should also provide information on how to appeal.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating on the basis of race, gender or other specified factors. And the Federal Trade Commission Act prohibits banks from engaging in unfair or deceptive practices in all aspects of a loan transaction, including servicing and collections.
If you think you're being treated unfairly and you can't resolve a problem directly with the institution, consider contacting its government regulator. The FDIC and other banking regulators may be able to help by providing information about your consumer rights or by contacting an institution that doesn't appear to be responding to your complaint. In addition, a regulator also can seek corrective action if an institution is in violation of a federal law or regulation.
While the FDIC insures deposits in nearly all banking institutions in the United States, we may not be the primary regulator of a particular institution. To find out who regulates an institution, you can call the FDIC toll-free at 1-877-ASK-FDIC (that's 1-877-275-3342) or check the FDIC's Bank Find directory at www2.fdic.gov/idasp/main_bankfind.asp.
Source: Summer 2008 FDIC Consumer News. This publication may be reprinted in whole or in part. Please credit FDIC Consumer News.