Client Alert

On August 26, 2008, the Office of Thrift Supervision issued guidance regarding the termination, reduction, or suspension of home equity lines of credit (“HELOCs”). Click here for a copy of the Release. This Release adds to the growing body of guidance, including the Federal Reserve Board’s June 12, 2007 press release, relating to the complete or partial limitation of access to HELOCs. While this OTS Release provides a review of those legal considerations that thrifts must take into account before terminating, reducing, or suspending a HELOC, more importantly, it gives an insight into how the OTS and other financial institution regulators may conduct safety and soundness reviews of financial institutions who reduce borrowers’ access to HELOC products. The OTS notes that “when taking such actions, associations must follow the federal rules designed to protect HELOC customers.” From this Release it appears that HELOC account management practices will receive high priority during exams to ensure that all necessary legal requirements are met.

The OTS specifically states that thrifts who terminate, reduce, or suspend a HELOC must comply with Regulation Z which implements the Truth in Lending Act. The Release specifically adds that with some exceptions, consistent with Regulation Z, creditors may freeze or reduce a HELOC account when: 

• The value of the collateral declines significantly below the appraised value; 
• The creditor reasonably believes that the consumer will be unable to make payments as agreed because of a material change in the consumer’s financial circumstances; and 
• The consumer is in default on a material obligation of the HELOC agreement.

The Equal Credit Opportunity Act and the Fair Housing Act and their implementing regulations, as well as the OTS Non-Discrimination Rule prohibit savings associations from discriminating based on race, sex/gender, or other protected characteristics when making credit decisions. Likewise, thrifts that suspend or reduce HELOCs based on declining property values should take reasonable steps to avoid the possibility of redlining. Redlining is a form of illegal disparate treatment in which a lender provides unequal access to credit or unequal terms of credit because of race, color, national origin, or other prohibitive characteristics of the residents of an area.

When a thrift terminates, reduces, or suspends a HELOC, a thrift is responsible for providing a borrower with a timely adverse action notice that contains specific information about the action taken. The Release lists the requirements under the Fair Credit Reporting Act and Section 5 of the Federal Trade Commission Act that an institution must satisfy to reduce HELOC availability. Finally, the OTS notes that to effectively address both credit and legal risk, associations must appropriately integrate safety and soundness, and compliance measures into any program to reduce or eliminate HELOCs. This leaves little doubt that these guidelines will be incorporated into future safety and soundness reviews.

While the Release only applies to thrifts, its analysis of current legal requirements under existing federal law applicable to all insured depository institutions indicates that a similar analysis of HELOC practices will likely be performed by other bank regulators.

We will continue to monitor this matter and future safety and soundness reviews to gauge what additional guidance the OTS or other financial institution regulators may give regarding this area.

As always, if you have any questions about this or another banking matter, please contact any member of the Banking and Financial Institutions Team at Womble Carlyle Sandridge & Rice, PLLC. Readers are urged to consult with their regular contacts at Womble Carlyle or Steve Dunlevie at 404-888-7401, Betty Temple, at 864-255-5415, Richard Hills, at 404-888-7475, David Adams, 404-879-2492, or Robin Ralls at 404-879-2481.