Washington – Some of the millions of homeowners who have seen their home-equity lines of credit, or HELOCs, sharply curtailed or even halted may have a legitimate gripe with their lenders. Although banks certainly have the right to reduce, suspend or even terminate revolving lines of credit in which the borrower’s home serves as collateral, they can’t do so willy-nilly.  Several consumer-protection laws must be followed. And even when the law is on their side, banks are required to reinstate credit lines when the reasons for the reduction or suspension no longer exist.
   Under Regulation Z, which implements the Truth in Lending Act, lenders are generally prohibited from closing a credit line and accelerating repayment of the outstanding balance.  The main exceptions are when the borrower committed fraud or made material misrepresentations to obtain the loan or when the borrower fails to repay the line as promised. Those two exceptions to Regulation Z are obvious and straightforward.  Lie to get the loan or miss a couple of payments, and the line of credit can be yanked. But a third exception – when actions adversely affect the property pledged as collateral or the creditor’s security interest in the property – is somewhat more ambiguous and is worth exploring in detail by borrowers who think they’ve been treated unfairly.
According to recent guidance issued by two federal agencies – the Federal Deposit Insurance Corp. in June and the Office of Thrift Supervision last month – a lender can freeze or reduce a HELOC account when the value of collateral declines significantly below the appraised value.
   The problem, though, is that the term “significant decline” is not defined within the regulation.  The OTS says it depends on individual circumstances.
But there is an “official interpretation” of Regulation Z on the books from a third agency, the Federal Reserve Board.  It says that for a lender to be within its rights to clip a line of credit or pull it altogether, the difference between the credit limit and the available equity at the time the account was opened should have been reduced by at lest 50%. The 50% “rule” is not as wide a gap as it seems, however Values don’t have to plunge 50% for your equity line to be shut down.  Rather, it’s only the amount of unencumbered equity that needs to fall by half. Say, for math simplicity’s sake, that a house with a first mortgage of $50,000 is appraised at $100,000.  Now say the bank gave you a $30,000 line of credit.  As the Fed figures it, the difference between your credit limit and the available equity is $20,000, and half of that is $10,000. Therefore, your lender can cut you off if the value of your house decreases by just 10%, from $100,000 to $90,000.
   The bank is not required to obtain an appraisal before suspending someone’s credit privileges.  But it is violating the law if it does so – in the words of the OTS – “in a geographic area in which real estate values are generally declining without assessing the value of the collateral that secures each affected HELOC account.” A lender, the OTS says, “should have a sound factual basis” for concluding the specific property and securing each and every one of the credit lines it curtails. If the creditor determines its loan is in danger, it must notify the borrower in a timely manner, and “certain legal requirements designed to protect consumers must be followed,” the FDIC says in its reminder. Mainly, that means you must be notified within three business days after the action has been taken. Lenders also have the right to curtail credit if they determine that you no longer have the ability to repay.  But they are required to provide specific reasons for that action too. Lenders can act solely on information obtained from others that bears on your creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living.” This includes your failure to pay other debts.  So if you fail to make a car payment, your equity lifeline can be shut off.
   Here’s the good news: Your lender is required by Regulation Z to reinstate your credit privileges in a timely manner when the circumstances that caused you to be cut off in the first place no longer exist.The lender may require that borrowers request that the spigot be turned back on. But if so, the bank must answer promptly.  It can’t dawdle.  And if you are not required to request reinstatement, the FDIC says the lender is responsible for monitoring the credit line to determine if and when your loan can be revived.