The Office of Thrift Supervision issued guidance Tuesday detailing when it is appropriate for thrifts to suspend home equity lines of credit.
Declining home prices and increasing delinquencies have made home equity lending a far riskier business, and some large financial institutions have reacted by freezing or reducing borrowers' lines. But the Truth-in-Lending Act prohibits lenders from terminating a home equity loan and accelerating repayment of a balance before the scheduled expiration date except in three circumstances.
The OTS guidelines outlined the exceptions, including fraud or material misrepresentation, failure to meet repayment terms for any outstanding balance, or actions adversely affecting the property.
A lender may also freeze or reduce a home equity loan when the home's value declines significantly below the appraised value, the borrower cannot make payments because of a material change in finances, or the loan is materially in default, the OTS said.
The guidance was consistent with previous releases by regulators; the OTS said its latest version was meant to serve as a reminder to thrifts. It also detailed when an institution may charge fees to reduce a home equity loan and when a lender should provide notice of a termination, suspension, or reduction.
The OTS said it plans to review thrifts' home equity lending to ensure compliance with existing regulations.
Other regulators are taking note of home equity lending. Last week the Federal Deposit Insurance Corp. published "Tips for trying to Fix a Clogged or Frozen Home Equity Line."
A Foresight Analytics LLC analysis of FDIC data showed second-quarter home equity nonaccruals at commercial banks nationwide increased 165% from a year earlier, to $4.6 billion. Banks with more than $100 billion of assets had the sharpest increases in nonaccruals and the highest delinquency rates.
At the 50 largest thrifts, home equity nonaccruals increased 345%, according to Foresight. The OTS will release delinquency rates for all thrifts at its quarterly briefing today.
