The Federal Deposit Insurance Corp. is urging banks to follow certain legal requirements before freezing or reducing a borrower's home equity line of credit.
Many financial institutions have blocked access to credit lines or lowered their limits as low home values and delinquencies increase the risk of making home equity loans. In a June 26 letter, released Tuesday, the agency reminded institutions that such moves have consequences for consumers, and a variety of laws restrict when credit freezes are permitted.
"In addition to ensuring legal compliance, the FDIC urges institutions to adopt best practices for working with borrowers who may experience financial hardship or significant inconvenience as a result of a reduction or suspension of their credit limits," it said.
Changes in home equity lines by large institutions such as Bank of America Corp. and Washington Mutual Inc. have been well documented. But the FDIC's guidance indicated that smaller institutions are making similar moves. (No other regulator has issued guidance).
The FDIC warned that banks could face penalties for failing the legal standards for freezing credit.
"Violations of these laws will result in enforcement action and may have a negative effect on the Community Reinvestment Act … evaluations of the institutions," it said.
