The Rules on Home-Equity Lines

The Rules on Home-Equity Lines

By Benny L. Kass
Saturday, September 20, 2008; Page F09

There are federal laws that can provide you some protection if your lender wants to cancel or reduce your home-equity line of credit.

Home-equity lines are popular with homeowners because they make it easy to tap into cash. But in the wake of the mortgage meltdown, lenders are reducing or canceling many of these credit lines because of concerns over falling home values.

This summer, both the Federal Deposit Insurance Corp. and the Office of Thrift Supervision issued guidance to the institutions they oversee to remind them that when they change these credit lines, they have to follow the laws. Among the federal laws that protect consumers in these situations are the federal Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Federal Trade Commission Act.

The Truth in Lending Act prohibits a lender from terminating the credit line and demanding payment in full before the agreed-upon expiration unless the borrower has committed fraud or provided materially misleading information to the lender in the loan application. The lender also has the right to call the loan if the borrower becomes delinquent and does not make the required payments.

However, even in these circumstances, the Office of Thrift Supervision encourages lenders to "work with borrowers to determine an appropriate strategy for mitigating risk."

Lenders do have the right to take steps short of demanding immediate payment in order to reduce their exposure. "For example, an association [lender] could suspend or 'freeze' further advances, reduce the credit limit, or change payment terms," the Office of Thrift Supervision suggested.
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But even should your lender opt to make those kinds of changes, there are legal limitations and restrictions. For example, under the Truth in Lending Act, while a lender has the right to freeze additional draws or reduce the credit limit, it cannot require the borrower to make higher monthly or quarterly payments.

Regulation Z is the implementation of that law as promulgated by the Federal Reserve Board. According to this regulation, for a lender to be satisfied that the value of the house has decreased sufficiently so that protective action can be taken, the difference between the credit limit and available equity today has to be reduced by 50 percent from the time the credit line was first made available.

Lenders cannot make this calculation based on regional statistics. They have to evaluate your house. According to the Office of Thrift Supervision, "while Regulation Z does not require a savings association to obtain an appraisal to determine whether collateral value has significantly declined, an association should have a sound factual basis for reaching this conclusion."

If your lender reasonably believes that you will be unable to continue to make payments because your circumstances have materially changed, the lender would have the right to impose restrictions on your loan. But this requires a two-prong review: your circumstances have to materially change and your lender must have a reasonable belief. I suspect that as more lenders start to put restrictions on equity lines of credit, there will be a lot of litigation requiring that lenders prove both these factors.

Another law that consumers can use to challenge restrictions on their home-equity loan is the Equal Credit Opportunity Act. Lenders cannot discriminate against potential borrowers based on such factors as race, sex, religion or national origin. Redlining -- the practice of not making loans in certain geographical areas -- is strictly prohibited.

Under the Fair Credit Reporting Act, if the lender uses information contained in a credit report to suspend or reduce a credit line, the lender must give the consumer a document known as an adverse action report. This report enables the consumer to understand -- and challenge if necessary -- the lender's decision.

Finally, the Federal Trade Commission Act may be of assistance to consumers faced with equity line problems. According to the FTC, under this act, "the Commission is empowered, among other things, to (a) prevent unfair methods of competition, and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; . . . "

Our economy is in a difficult time, and certainly mortgage lenders are feeling the brunt of the problems. They have the right to protect their investments, but they have to do so legally.

If you learn that the terms and conditions of your equity line are about to change, make sure that your lender is in full compliance with the laws. And remind your lender of the recent suggestion from the FDIC, which urged institutions "to work with borrowers to minimize hardships that may result" from any reductions or suspensions of your loan.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site,http://www.kmklawyers.com.