Thousands of home equity line of credit (HELOC) customers have received notice that their accounts have been frozen. Many are still wondering if it is legal for banks to freeze HELOCs.

The short answer: Yes. Banks may freeze home equity lines. However, they can only do so under specific circumstances.

The Oregoneon reports:

“In general, banks are prohibited from changing the terms of home equity lines of credit; however, there are exceptions. Federal regulations allow lenders, for example, to freeze additional extensions of credit or reduce the applicable credit limit “during any period in which the value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan,” according to FDIC regulations. To use this exception, however, lenders must determine that a “significant decline” occurred.

Even though full individual appraisals aren’t necessary under the law, institutions should have a sound factual basis for determining that a property has experienced a significant decline in value. For example, automated valuation models or local tax assessments may be used.”

Most banks have followed federal guidelines for freezing home equity lines. However, last month the FDIC sent warning letters to many lenders, encouraging them to meet their legal obligations.

See Also:

FDIC Warns Lenders About Freezing HELOCs

List of Lenders Freezing Home Equity Lines of Credit

Tags | FDIC, Heloc, heloc freeze, home equity line of credit, mortgage crisis