Finally, some good news for HELOC borrowers. Recently, the FDIC recently sent a letter warning lenders to follow proper procedure when freezing home equity lines of credit.

Here are a few of the most notable points:

- According to regulation, HELOC lenders may only reduce a borrower’s line of credit under certain circumstances.

- Lenders are permitted to reduce a credit line should the borrower’s home “decline significantly below the dwelling’s appraised value for purposes of the plan.”

- The Federal Reserve says a “significant decline” may be a drop of 50% or more in the home’s equity. However, this number may vary depending on individual circumstances.

- Lenders don’t need to do full individual appraisals to freeze a line. However, they must have a factual basis for believing that a property’s value has declined.

- Lenders may also suspend HELOCs if they believe that the borrower will not be able to pay back the loan due to a change in financial circumstances. This belief must be founded on a factual basis (i.e. a loss of income and late payments).

- Borrowers must be notified of HELOC freezes within three business days. The lender must specify whether borrowers need to request reinstatement of their lines. If they do not specify this, the lender must monitor the account and reinstate the line as soon as circumstances permit.

The definition of “significant decline” is of major interest. Many borrowers have had their HELOCs frozen due to a home value decline of much less than 50%. Unfortunately, the 50% example given by the Federal Reserve seems to be more of a guideline than a hard and fast rule.

Regardless, the above information can be extremely useful to borrowers facing line freezes. If your lender has frozen your line without following proper procedures, you may want to request a reconsideration.

See Also:

Which Borrowers are Freezing HELOC Lines?

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