Credit Freezers Told to Chill

This Just In...

The Office of Thrift Supervision publishes their purpose on their website:

"The OTS supervises savings associations

  and their holding companies to meet

  America's financial services needs."

Today, in response to a large number of consumer complaints, they issued a six page press release that deals with the way financial services have been handling lines of credit. The meat of the release is this:

“Declining home prices in parts of the country are prompting some institutions to curtail, suspend, or terminate customers’ home equity line of credit. Today’s guidance emphasizes that institutions taking such actions must comply with federal laws and rules designed to protect customers, including regulations implementing the Truth in Lending Act, Equal Credit Opportunity Act, Fair Housing Act and the OTS nondiscrimination rule.”

“A home equity line of credit is an attractive product for many homeowners and lenders,” the guidance said. “While sound underwriting and effective risk management systems are essential, associations must employ these strategies in a manner that complies with applicable consumer protection laws and regulations.”

In other words, they are warning lenders not to skirt the rules of the contracts behind home equity lines. In an interview with Kevin Hall of McClatchy Newspapers, a spokesman for the OTS said this, “There's an uptick in complaints, written and by telephone,” [further] “We just wanted to give our institutions a heads-up that our examiners are going to be focusing on this area.”

It's understandable that lenders are concerned with home equity loans. These contracts were granted based, in large part, on the value of personal property or create concern for the lending institution that borrowers may put such paper in an unbalanced position. Now that prices have declined in many areas such lines of credit hold a value greater than the property that secured it. However, the OTS is warning lenders that they still need to honor contract terms in a way that does not violate federal guidelines.

It remains to be seen how this warning will be interpreted by lending institutions.