Regulators Issue New Guidelines on Home Equity Lines of Credit
Federal and state regulators are putting more pressure on banks to take immediate actions to address looming defaults of home equity lines of credit.
The agencies are concerned banks are not being proactive enough in modifying HELOCs that are nearing their end-of-draw periods. Many borrowers make just interest payments on these second liens, but they could get into trouble when the HELOC resets and becomes fully amortizing. Borrowers could see their monthly HELOC payments jump by $100 to $400.
The agencies issued the joint guidance Tuesday morning that "encourages financial institutions to effectively communicate with borrowers about the pending reset and provides broad principles for managing risk as HELOCs reach their end of draw periods."
The guidance outlines 10 principles "so institutions can evaluate where they are today and what they need to do" to meet the expectation of the regulators, according to Bob Pierpergerdes, the director for retail credit risk at the Office of Comptroller of the Currency.
At a minimum, "every institution should understand what they have in end of draw exposures," said Pierpergerdes. "From there, the bank should have system in place that would be appropriate for the size and complexity of the portfolio."
In an interview, he noted that the OCC, along with the Federal Reserve Board, Federal Deposit Insurance Corp., National Credit Union Administration and Conference of State Bank Supervisors, issued the joint guidance so institutions would understand what the agencies expect regarding HELOC reset exposures.
As of March 31, FDIC-insured banks held $507 billion in HELOCs in portfolio and they charged off $909 million in second liens during the first quarter.
The OCC estimates $23 billion in HELOCs will reset in 2014 at the nine largest national banks. That will jump to $42 billion resets in 2015, $50 billion in 2016 and peak at $56 billion in 2017.
The other banking agencies have not revealed the reset exposure of their regulated institutions.
Overall, the regulators expect lenders to conduct a thorough evaluation of a borrower's willingness and ability to repay the loan "prior to extending draw periods, modifying notes and establishing amortization terms for existing balances," the guidance says.
Richard Hunt, the president and chief executive of the Consumer Bankers Association, said that member institutions have been diligently working with their customers well in advance of the end of their loan’s draw period.
"Our banks are taking all steps to help their customers and we look forward to continuing to work with consumers as they enter the repayment phase of their HELOC," Hunt said in a press release.
But one housing counselor said servicers continue to press HELOC borrowers to make lifestyle changes and reduce spending to deal with resets.
"They are taking the traditional course of action for people in financial distress," according to Aaron Horvath, who is in charge of strategic development at Springboard Nonprofit Consumer Credit Management Inc. in Riverside, Calif.
"First, they want to see if they can make any adjustments. When you can only do so much, they have to go to the next level of help," he said. But there is "still a reluctance" to do a HELOC mod, he said.
Jaret Seiberg, an analyst with Guggenheim Securities, said that regulators don't "want resetting home equity lines to become the next big banking scandal."
The regulators expect loan modifications to be sustainable and said that simply extending the interest-only payments will not pass muster.
"There is a suggestion in the guidance that principal forgiveness should be a tool for at-risk borrowers," Seiberg wrote in a July 1 note to clients.
But an OCC spokesperson denied such an interpretation. "The guidance encourages institutions to work with their borrowers to avoid unnecessary defaults and avoid future debt. The guidance does not contain specific language encouraging a particular type of modification," the spokesperson said.