Federal Regulators Issue Warnings On HELOCs

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NCUA joined the banking regulators last week in issuing a warning letter that credit unions may not be fully assessing the risks associated with home equity loans and lines of credit and loans, which have become an increasingly popular product as home prices have climbed.

"In many cases, the institutions' credit risk management practices for home equity lending have not kept pace with the product's rapid growth and easing of underwriting standards," said NCUA.

According to NCUA, home equity lines of credit issued by federally insured credit unions increased by almost 30% last year, to $34 billion, or 8% of the total loan portfolio.

The regulators cited several risk factors that have invited scrutiny, along with vulnerability to interest rate increases. They are: interest-only features; limited or no documentation of assets, employment or income; higher loan-to-value and debt-to-income ratios; lower credit risk scores; greater use of automated valuation models; and increased numbers of transactions generated through loan brokers or other third parties.

"Typically," said NCUA, "home equity loans are long-term with interest-only features that require no amortization of principal for a protracted period. HELOCs generally do not have interest rate caps that limit rate increases. Therefore, they are inherently vulnerable to rising interest rates.

"In addition, with the rise in home values and demand for home equity lending in recent years, many financial institutions relaxed underwriting standards associated with these loans, such as higher loan-to-value and debt-to-income ratios."

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