Time to check the status of your Line of Credit

In an effort to reduce risk in this uncertain market, many banks are sending notices to home owners that their line of credit on their home has been frozen or reduced. In a letter to the banks from the FDIC, banks are urged to take a reasonable and systematic approach. A blanket reduction of equity lines could further aggravate the current credit crunch.

The FDIC also warns that banks must comply with truth in lending regulation Z. Here is an excerpt from the Letter:

Regulation Z generally prohibits lenders from changing the terms of home equity lines of credit; however, there are exceptions. For example, Regulation Z expressly permits lenders to prohibit additional extensions of credit or reduce the applicable credit limit “during any period in which the value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan.” To use this exception, lenders must determine that a “significant decline” occurred.

The term “significant decline” is not defined within the regulation itself. However, the Federal Reserve Board’s Official Staff Interpretations (Official Interpretations) to this provision of Regulation Z includes an example indicating that, while a “significant decline” will vary according to the circumstances, such a decline has occurred if the unencumbered equity is reduced by 50 percent. According to the Official Interpretations, a lender is not required to obtain an appraisal before suspending credit privileges, but there must be a significant decline in value. Although full individual appraisals need not be obtained, institutions should have a sound factual basis for determining that a property has experienced a significant decline in value. For example, automated valuation models or local tax assessments may be used, taking into account the issues described in the Home Equity Guidance regarding the validity of those values.

Other grounds for a reduction in line of credit include a material change in your credit or ability to repay the loan.

You can read the full letter here from the FDIC.

If you have received a reduction in your home equity line, you should contact your bank. They have to provide you the reason why they reduced your loan. If it is due to property value, be prepared as they may want to have your home appraised unless you can show why your home is valued more than they claim. If it is due to material change in your ability to re-pay the loan, make sure to ask why they believe this to be the case and again be ready to show them otherwise.

Most importantly, you should check the status of your loan before you make a purchase that will not be honored.

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