Credit Union Magazine - January 2009 - (Page 44)

COMPLIANCE Reg Z permits creditors to change HELOC terms in some circumstances. Will HELOCs Survive Declining Home Values? Michael McLain With declining home values plus increasing foreclosures, unemployment, and bankruptcies, credit unions offering home equity lines of credit (HELOC) should understand how these situations affect their rights to modify HELOC terms and conditions. Take proper action to reduce your risks of loss and litigation. Regulation Z generally permits creditors to change HELOC terms if the change: u Is insignificant, such as changing the address of the credit union to send a payment; u Will benefit the member; or u Is agreed to in writing by the member. Otherwise, Reg Z prohibits creditors from taking any other action on a HELOC plan, such as reducing the credit limit or terminating the plan, unless certain circumstances apply. Do you have the right to modify a HELOC and suspend or terminate the plan when the member’s home value has declined significantly from its appraised value, when the member’s payments are delinquent, or when the member becomes unemployed? Here are some of the most important changes credit unions may make: u Suspending plans or reducing limits. You may prohibit additional credit or reduce the credit limit during certain periods, provided a reduction below the outstanding balance doesn’t require the borrower to make higher payments. For example, you can reduce the credit limit to $10,000 from $20,000 even if the borrower has an outstanding balance of $12,000, in home values since the Great Depression. 2. The borrower’s financial circumstances change materially, such as a significant decrease in income, and, as a result, your credit union believes the borrower won’t be able to make payments. The Reg Z Commentary states a creditor may prohibit further advances or reduce the credit limit if a borrower files bankruptcy. uDeclining If you reduced the HELOC limit because the borrower lost a job, you must increase it when the borrower gets a new job with similar pay. provided the borrower doesn’t have to make a higher payment or immediately pay the over-limit balance of $2,000. You may suspend or reduce the credit limit during the time one or more of these three situations occurs, but you must reinstate the member’s credit privileges when the condition ceases: 1. A dwelling’s value declines significantly below its appraised value. It’s important to understand when this situation applies because many areas are experiencing the most dramatic drop 3. The borrower defaults on a material obligation of the HELOC agreement. Your loan agreement may specify events that would qualify as a default. For example, the borrower moves out, permits an intervening lien to be filed that would take priority over future advances under the plan, or fails to make required payments. While any of these situations could occur, most of this discussion focuses on a decline in value because the other two situations appear more straightforward. value. A significant decline in value of collateral will vary according to individual circumstances. Members will have varying amounts of home equity, loanto-value ratios, and loan amounts. A significant decline exists if the value declines by 50% of the available equity (measured by subtracting the HELOC credit limit and other existing mortgage amount from the appraised value). For example, assume a house with a first mortgage of $80,000 is appraised at $150,000, and the HELOC credit limit is $30,000. The total of the first mortgage balance and the HELOC credit limit is $110,000, leaving available equity of $40,000. Half of that is $20,000. So you could prohibit further advances or reduce the credit limit if the property value declines by $20,000 or more. The Reg Z Commentary states a creditor isn’t required to obtain an appraisal before suspending credit privileges, although without an appraisal you’d have to determine the value via some other reasonable manner. When you suspend further extensions under the HELOC plan or reduce the credit limit based upon the designated cir- 44 CREDIT UNION MAGAZINE uJANUARY 2009 ucuna.org http://www.cuna.org

Table of Contents Feed for the Digital Edition of Credit Union Magazine - January 2009

Credit Union Magazine - January 2009 Contents On My Way Leading Edge Spotlight President's Perspective Game Plan Washington Insider Wright Stuff Executive Suite Reverse Mortgages Come of Age Six Merger Myths Leading-Edge Lenders TwentyFour/Seven Bankruptcy Compliance Tools of the Trade Trendlines Rates & Ratios Council Corner Shoptalk System Scan Marketplace Branching Out Advertiser Index

Credit Union Magazine - January 2009

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