Feds Issue Warning on HELOC Lending

Federal regulators are warning banks and thrifts to review their lending practices with respect to home equity lines of credit due to the rapid growth of HELOC lending over the past two years."The agencies have found that in some cases credit risk management practices for home equity lending have not kept pace with the product's rapid growth and eased underwriting standards," according to new guidance issued by bank, thrift, and credit union regulators. The regulators caution that certain features --such as interest-only payments, high loan-to-value ratios, reliance on automated appraisals, and third-party originations -- will "attract scrutiny" from examiners. "Active portfolio management is especially important for financial institutions that project or have already experienced significant growth of concentrations" in higher-risk HELOC products, the guidance says. Borrowings on HELOCs grew at a 42% annual rate in 2004 and a 33% annual rule in 2003 at institutions insured by the Federal Deposit Insurance Corp.