Numerous consumer complaints regarding freezing or reducing the available credit on HELOC's or home equity lines of credit have gotten the attention of the Treasury Department, the FDIC and the OTS or Office of Thrift Supervision, a branch of the Treasury Department.
As home values in many areas continue to decline complaints continue to grow that some thrifts are freezing the credit promised to borrowers and that they may be altering accounts that were not supposed to be changed.
After receiving what OTS describes as an "uptick in complaints" regarding Savings and Loans reducing or freezing HELOC's, the OTC issued a six page letter to the institutions known as thrifts which spells out their obligations to HELOCs.
The letter of guidance may serve more as a warning to thrifts that they can freeze promised credit only under approved circumstances and not for broad geographic areas that may be harder hit by the housing slump than others. Each loan must be looked at individually in order to determine a "significant decline" in value. Regulation Z has interpreted and considers "significant decline" to be at least a 50% drop in the homes equity from the time the HELOC was issued.
i.e. Assume that a house had a first mortgage of $50,000 and appraised for $100,000. A $30,000 HELOC is opened leaving the available equity at $20,000. The creditor could reduce the available credit if the home value declined to $90,000 or 50% of the equity at the time the HELOC was taken.
The letter of guidance to thrifts goes on to outline legal risks to thrifts violating Regulation Z by stating:
"Regulation Z, which implements the Truth In Lending Act (TILA) sets forth the circumstances under which a HELOC may be terminated, suspended or reduced. Savings associations are responsible under Regulation Z for timely reinstatement of lines of credit that cease to meet the criteria for suspension or reduction." .............
"With limited exceptions, Regulation Z prohibits lenders from terminating a HELOC and accelerating repayment"
Exceptions include fraud, failure to meet repayment terms and actions adversely affecting the property.
The FDIC has a hot line for concerned consumers 877-ASK-FDIC
The OTC also has hotline available at 800-842-6929