OTS Issues Guidance On HELOC Servicing
The Office of Thrift Supervision has issued guidance to OTS-regulated financial institutions about the way they manage home-equity line of credit programs so they are fair to customers, efficiently manage credit risk and comply with the law.
Quoting concerns about the fact that declining home prices in parts of the country "are prompting some institutions to curtail, suspend, or terminate" customers' home-equity lines of credit, OTS has issued guidance intended to ensure such measures comply with federal laws and rules.
The OTS emphasizes that institutions taking these actions "must comply" with regulations "designed to protect customers," including regulations implementing the Truth in Lending Act, Equal Credit Opportunity Act, Fair Housing Act and the OTS nondiscrimination rule.
The guidance recognizes that despite the ongoing market crisis, home-equity lines of credit remain attractive options for many homeowners and lenders.
It stresses, however, that 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."
"It's a very interesting document. It's a good illustration of the fine line the OTS is trying to walk," said Dan Tobin a partner in the litigation department in the Bethesda, Md., office of Ballard Spahr Andrews & Ingersoll. "I know that lots of banks out there view home-equity lines of credit as some kind of time bomb because the economic stress is hurting people so their ability to repay loans is diminishing, collateral is dropping and home-equity lines almost always are going to be second lien loans and a lot of them have some age on them."
To the extent a home-equity line of credit was done two or three years ago "when money was easier," he explained, it may well be that someone who took a $100,000 HELOC to put a new roof over their head "now has more need to access the credit while their ability to pay is down and the value of the collateral is down." So the current situation creates a huge concern for lenders.
As to OTS, its pre-eminent concern as an institution is the financial soundness of the associations it regulates, which are all the federally chartered thrifts.
"If you read this document it's not like it is broadcasting a big warning signal to the industry," Mr. Tobin argued, "rather it aims to identify all the potential traps that banks can fall into" if they start terminating the HELOCs.
"I found it very interesting. It's very carefully written. On the one hand they note it is a good idea to take a very good look at these loans and get them under control whenever possible, but be careful to do it the right way because if you do it the wrong way you could face a huge liability risk."
The guidelines suggest lenders should be cautious when dealing with HELOC management since these portfolios can affect the bottom line unless careful risk management practices are applied. It appears the guidance focuses on customer protection, he said, but at the same time it is a call for more careful risk/loss mitigation.
The guidance stresses that since HELOCs often have long-term or interest-only payment features, "OTS expects associations to actively manage their home-equity portfolios."
Among the suggested measures is that lenders maintain effective risk management systems, as explained in the 2005 HELOC Credit Risk Management Guidance and that they comply with the OTS real estate lending standards rule and guidance.
"The goal of managing credit risk is important from a safety and soundness perspective," OTS said. "Therefore associations often structure HELOC plans so that the available credit limit can be reduced, suspended or terminated."
OTS said it will review all such actions taken on HELOCs as well as HELOC account management policies and practices to ensure compliance. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/