On August 26, 2008, the OTS issued guidance on reducing, suspending or terminating home equity lines of credit (referred to collectively as “adjustments”), noting that increased adjustments are likely due to declining home prices. By their terms, many home equity products allow creditors to make adjustments. However, federal consumer laws (most notably Reg Z) often impact these adjustments, and compliance is important for institutional management of home equity products.
With certain exceptions such as fraud, default or actions that adversely affect collateral value, creditors may not terminate home equity lines and demand repayment. Instead, creditors may freeze or reduce credit lines or alter payment terms when (i) collateral equity values experience a significant decline, generally a reduction of 50 percent or more in the difference between the home value and credit limit; (ii) the borrower’s financial condition materially changes such that the creditor reasonably believes the borrower will be unable to make payments; or (iii) the borrower defaults under the credit agreement. Creditors must timely reinstate credit privileges upon resolution of events that caused the adjustment.
ECOA’s Reg B adverse action notice is not generally triggered by home equity adjustments in those cases where the borrower has expressly agreed (in the credit agreement or elsewhere) to a change in terms or when action is taken due to “inactivity, default, or delinquency” of the account. FCRA’s adverse action notice requirements would apply, however, in those cases where a creditor makes a home equity adjustment based on information obtained from a credit report.