More on Regulation Z and your heloc loans

I was surprised at the large response to the last post about regulation z of the fair lending practices set forth by the FDIC and as such decided to add a few more details to how it directly protects you regarding Helocs.

Under section 226.5b of the fair lending guidelines, you will find provisions for heloc loans. Section F is probably the most interesting to consumers given the current the housing market:

(f) Limitations on home equity plans. No creditor may, by contract or otherwise:
(1) Change the annual percentage rate unless:
(i) Such change is based on an index that is not under the creditor’s control; and
(ii) Such index is available to the general public.
(2) Terminate a plan and demand repayment of the entire outstanding balance in advance of the original term (except for reverse mortgage transactions that are subject to paragraph (f)(4) of this section) unless:
(i) There is fraud or material misrepresentation by the consumer in connection with the plan;
(ii) The consumer fails to meet the repayment terms of the agreement for any outstanding balance;
(iii) Any action or inaction by the consumer adversely affects the creditor’s security for the plan, or any right of the creditor in such security; or
(iv) Federal law dealing with credit extended by a depository institution to its executive officers specifically requires that as a condition of the plan the credit shall become due and payable on demand, provided that the creditor includes such a provision in the initial agreement.
(3) Change any term, except that a creditor may:
(i) Provide in the initial agreement that it may prohibit additional extension of credit or reduce the credit limit during any period in which the maximum annual percentage rate is reached. A creditor also may provide in the initial agreement that specified changes will occur if a specified event takes place (for example, that the annual percentage rate will increase a specified amount if the consumer leaves the creditor’s employment).
(ii) Change the index and margin used under the plan if the original index is no longer available, the new index has an historical movement substantially similar to that of the original index, and the new index and margin would have resulted in an annual percentage rate substantially similar to the rate in effect at the time the original index became unavailable.
(iii) Make a specified change if the consumer specifically agrees to it in writing at that time.
(iv) Make a change that will unequivocally benefit the consumer throughout the remainder of the plan.
{{12-31-07 p.6652.03}}
(v) Make an insignificant change to terms.
(vi) Prohibit additional extensions of credit or reduce the credit limit applicable to an agreement during any period in which:
(A) The value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan;
(B) The creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer’s financial circumstances;
(C) The consumer is in default of any material obligation under the agreement;
(D) The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement;
(E) The priority of the creditor’s security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; or
(F) The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice.

Section 3vi A-F, provide the details as to when a bank can make changes to your heloc credit line. In summary, short of any government intervention, your property has to have a material change in value or you have give reason that your ability to repay the loan is no longer secure.

While these guidelines are in place, they fail to define what “material” is. Given today’s market, banks will be stretching “material” as far as possible and that is what the FDIC is concerned about.

If you find yourself arguing with your bank, it is up to them to tell you how they define “material”. They must prove to you they are within the guidelines, so use that to your advantage. Be persistent and a pain in the ass. Make them pay for appraisal, credit reports, and any other information they claim. Ask them to prove their guidelines are within reason. These guidelines are the only thing you have to protect you, so use them the best you can.

While many abuse home equity lines, they still do play an important roll. A blanket tightening of un-used equity lines could further damage the fragile housing market.

Please comment with any strategies you know to help home owners facing a reduction in home equity lines by their banks.