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S&Ls given warning about freezing credit
The Office of Thrift Supervision warns against improperly lowering credit limits or altering rules for home-equity loans.
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WASHINGTON - After a rash of consumer complaints, the federal agency charged with regulating savings and loan institutions issued guidance Tuesday warning lenders they could not arbitrarily change the terms of home equity loans.
The Office of Thrift Supervision (OTS) issued a six-page letter of guidance to the institutions, called thrifts, spelling out their obligations on home equity lines of credit.
Such revolving lines of credit were popular during the housing boom of 2001 to 2005, when people could easily borrow against the equity in their homes to pay for college tuition, to build a garage or to remodel a kitchen. Equity is the home's market value minus the outstanding loan balance.
Now, a national housing slump is into its second year with no end in sight. Many borrowers own homes worth less than the amount of their loan, and home equity lenders are tightening up amid rising defaults.
As national housing problems worsened, complaints to the OTS grew that some of the 830 thrifts under its supervision were freezing the credit promised to borrowers and altering rules for accounts that weren't supposed to be changed.
"There's an uptick in complaints, written and by telephone," OTS spokesman William Ruberry said in an interview.
Given the rise in complaints, the OTS guidance serves as a warning shot by regulators, who across the scope of the federal government failed to recognize rampant, shoddy lending that sparked an unprecedented national run-up in home prices. That run-up proved unsustainable and led to the plunge in national home prices and a market in its worst shape since the Depression.
"We just wanted to give our institutions a heads-up that our examiners are going to be focusing on this area," Ruberry said of the home equity loans.
Specifically, the OTS guidance reminds thrifts that they can freeze promised credit under approved circumstances like a substantial loss in value of the underlying property. But any reduction of a borrower's credit limit below the outstanding balance cannot require the borrower to make a higher payment.
And given that entire neighborhoods in hard-hit states like California, Arizona and Florida are at risk of widespread foreclosure because of steep drops in home values, thrifts were reminded they cannot freeze home equity lines for broad geographic areas.
Instead they must weigh each loan individually to determine when there has been a "significant decline" in the value of the collateral, the home. That "significant" decline is generally viewed as a 50 percent drop in the home price from the time when the home equity line of credit was offered.
The thrift supervisor also told lenders they cannot charge a fee for restoring the credit once the condition leading to the freeze has been determined to have been fixed.
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