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Previously Suspended HELOC Line Amounts: Don't Forget TILA

2/19/2020 - By Jennifer Paradise, CRCM

Many of us have seen rising property values in recent years, which is generally a good thing. However, this brings up a regulatory issue for creditors that suspended or reduced the limit on home equity lines of credit (HELOCs) due to a significant decline in value resulting from the mortgage financial crisis that began in 2008. The Commentary to §1026.40(f)(3)(vi) of the Truth in Lending Act’s implementing Regulation Z indicates that what defines a ‘significant decline’ varies according to individual circumstances, but in any event applies “if the value of the dwelling declines such that the initial difference between the credit limit and the available equity (based on the property's appraised value for purposes of the plan) is reduced by fifty percent." 

Creditors have a responsibility to monitor whether the significant decline in value has been cured. The same Commentary as above states "when the circumstance justifying the creditor's action cease to exist, credit privileges must be reinstated, assuming that no other circumstance permitting such action exists at that time." Therefore, creditors must reinstate the reduced HELOC privileges as soon as reasonably possible. In order to be compliant with Regulation Z, creditors should be monitoring whether such properties are no longer subject to significant decline in values as defined previously.

Fortunately, Regulation Z provides creditors an alternative to constant monitoring. The Commentary allows creditors to shift the burden to the borrower if in the initial notice of Change in Terms the creditor makes clear that the consumer is responsible for requesting reinstatement.  

If your bank or credit union took action to suspend or reduce the credit limit on HELOCs based on significant decline in property values, now is a good time to review the applicable regulatory requirements discussed here. For further discussion you may also refer to a 2013 Consumer Compliance Outlook article titled HELOC Plans: Compliance and Fair Lending Risks When Property Values Change.  

This article is current as of January 29, 2020, and may not be updated for regulatory changes occurring after this date. The opinion expressed here is for informational purposes only and readers are encouraged to review any current state or federal law and regulation that applies in all jurisdictions where a company operates, and to seek legal counsel as necessary.

About the Author | Jennifer Paradise, CRCM
Jennifer is a consultant in the Financial Institution Advisory Group at Saltmarsh, Cleaveland & Gund and has been serving the financial institutions industry since 1990. Her experience includes regulatory compliance, operations management, sales management, investment advisor, lending, marketing and training. Jennifer is primarily involved in performing fair lending reviews (including risk assessments and data analysis), loan operations internal audit, loan compliance reviews, and other consulting services for our financial institution clients.


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