The federal banking agencies, the NCUA and the Conference of State Bank Supervisors have issued joint guidance that describes core operating principles that should govern the oversight of home equity lines of credit (“HELOCs”) nearing their end-of-draw periods. The Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods released on July 1 encourages effective communication with borrowers about the pending reset of periodic payments to begin repayment of the principal amount of the HELOC, and provides broad risk management principles. According to the guidance, examiners will review financial institutions’ HELOC end-of-draw risk management policies and procedures for provisions that address five risk management principles: prudent underwriting for renewals, extensions and rewrites; compliance with existing regulatory guidance; use of well-structured and sustainable modification terms; appropriate accounting, reporting and disclosure of troubled debt restructurings (“TDRs”); and appropriate segmentation and analysis of end-of-draw exposure in allowance for loan and lease losses estimation. For example, the risk management principles point out that existing regulatory guidance recommends that HELOC underwriting criteria should include debt service capacity standards, creditworthiness standards, equity and collateral requirements, maximum loan amounts, maturities and amortization terms. The guidance on modifications clarifies that TDR treatment is appropriate when a lender grants a concession to a borrower that it would not otherwise consider because of the borrower’s financial difficulties. The agencies expect each institution to apply the HELOC end-of-draw guidance in a manner commensurate with the size and risk characteristics of its HELOC portfolio.
Nutter Notes: The HELOC end-of-draw guidance also describes examiners’ expectations for risk management policies and procedures specific to HELOCs nearing their end-of-draw periods. According to the guidance, examiners will generally expect institutions to generate reports that provide a clear understanding of end-of-draw exposures and identify higher-risk segments of the portfolio. The guidance recommends that such reports identify contractual draw period transition dates for all HELOCs, showing maturity schedules in the aggregate and by significant segments of performing and non-performing borrowers, and distinguishing between performing borrowers that are higher risk and those that are not. The guidance also recommends contacting borrowers through outreach programs. Examiners will generally expect management to begin contacting borrowers about the end-of-draw transition well before their payment reset date, to engage in periodic follow-up with borrowers and respond effectively to issues, according to the guidance. Examiners also expect management to have quality assurance, internal audit and operational risk management functions perform targeted testing, commensurate with the volume of the financial institution’s HELOC exposure, of the full process for managing end-of-draw transactions, according to the guidance. The agencies expect that community institutions with smaller HELOC portfolios, few portfolio acquisitions or exposures with lower-risk characteristics may be able to use less-sophisticated processes for monitoring their portfolios. The guidance points out that when an institution outsources all or a portion of HELOC management, the institution remains responsible for ensuring that the vendor complies with applicable laws, regulations and supervisory guidance.