In a shift from past practice, National City Corp. has informed home equity line of credit customers who are above their approved draw limits that they must get under them by the end of their March billing cycles.
Ken Carter, the head of Nat City's national home equity division, which lends through brokers, confirmed that the lender had usually just collected the interest and any principal due on a normal schedule. Chris Kemper, a spokesman, added that it had dealt with overlimit customers "on a case-by-case basis."
Mr. Carter said the recent change was sparked by guidance on home equity lending that banking regulators released jointly last spring. The accounts of HELOC borrowers who do not meet the deadline will be classified as delinquent, he said.
Nat City would not say how many such customers are overdrawn, but an internal memo last week said that the previous practice had resulted in a "substantial backlog of overlimit accounts."
Nor would the Cleveland banking company say what its policy is for funding checks or HELOC-card draws that would take customers over their approved limits.
Nat City told its overlimit HELOC customers of the new policy in a letter at the start of this month. The letter reminded them that the credit limits are in their contracts, and that failing to get under them now could lead to negative credit reporting.
Mortgage production employees were alerted to the change in last week's memo, which told them to refer borrower inquires about the new policy to customer service or to channels in which borrowers could refinance into larger equity lines.
Mr. Carter said the change triggered a flurry of phone calls from customers.
Some were happy for the reminder and time to comply, but some "thought we had not treated this differently in the past, so why should it change?" he said.
In the May home equity guidance, regulators - including Nat City's, the Office of the Comptroller of the Currency - warned that "account management practices that do not adequately control authorizations and provide for timely repayment of overlimit amounts may significantly increase a portfolio's credit risk." It told banks to "require overlimit borrowers to repay in a timely manner the amount that exceeds established credit limits."
There was no compliance deadline.
The guidance - which dealt with a variety of home-equity practices - was prompted by the regulators' view 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," it said.
An October survey by the Federal Reserve Board found that big banks had responded with few changes in underwriting. Mr. Carter said that the guidance did cause a broad review of Nat City's practices, but "really did not affect anything we were doing on the origination side."
On Dec. 31, Nat City held $21.4 billion in HELOCs, which account for about 20% of its loan portfolio. The HELOCs from its "consumer and small-business financial services" business line were 50% drawn. In the "national consumer finance/national home equity" business line, which includes Mr. Carter's wholesale business, that figure was 53%. (The overall chargeoff rate for the HELOC portfolio doubled from the third quarter, to 0.28%.)
Dave Miller, the senior vice president of business development at Cenlar FSB of Ewing, N.J., said its HELOC subservicing clients do not want it to automatically treat overlimit accounts as defaults or try to collect overlimit amounts.
This is probably because of the details of their fairly standard requests for how Cenlar (which got into HELOC subservicing last year) should deal with checks presented by a third-party processor that take borrowers above approved limits, he said.
Each client sets caps, in percentage or dollar figures, somewhat above approved limits for additional funds that can be disbursed immediately, he said. Beyond those limits, most clients also want Cenlar to give them a chance to approve disbursements for certain customers with whom they have good relationships.
When the disbursements are not approved, the checks are rejected as having "insufficient funds" behind them.
Conversations with current and prospective clients, which include several financial institutions, have indicated that none want to get more aggressive about collecting overlimit amounts, Mr. Miller said.
"From a risk and compliance standpoint, my guess is they're comfortable because they're making a knowledgeable decision in approving that overlimit," he said.
In other words, these lenders effectively raise credit limits when they knowingly allow borrowers to exceed official ones by significant amounts.
In an e-mail, a spokesman for Citigroup Inc.'s home loan businesses said it would let HELOC borrowers go no more than $100 over their credit limits. "However, we want to help our customers avoid" bouncing checks, so Citi solicits certain customers approaching limits for line increases and provides quick credit decisions to customers who call in seeking such increases, he wrote.
A spokeswoman for Washington Mutual Inc. said it considers overlimit HELOC borrowers to be delinquent unless they pay whatever would be normally owed, the total overlimit amount and any penalties by the end of the next billing cycle.
