Alert September 02, 2008

OTS Issues Guidance on Curtailing, Suspending or Terminating Home Equity Lines of Credit

The OTS issued guidance (the “Guidance”) to federal savings associations (“FSAs” and each an  “FSA”) concerning management of an FSA’s home equity line of credit (“HELOC”) program and curtailing, suspending or terminating a customer’s HELOC.  The Guidance states that when curtailing, suspending or terminating a HELOC, an FSA must ensure that it is acting in compliance with, among other consumer protection laws and regulations, the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act and OTS rules regarding nondiscrimination.  The Guidance notes that the Truth-in-Lending Act prohibits an FSA from terminating a HELOC and accelerating repayment of the balance except in cases of: (1) fraud or material misrepresentation; (2) failure to meet repayment terms for any outstanding  balance; or (3) actions adversely affecting the  property.  The Guidance further states that an FSA lender may also freeze or reduce a HELOC when the value of the collateral “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.  Moreover, the Guidance notes that a lender’s action to suspend or reduce a HELOC must be based upon a sound factual assessment of the value of the individual property (which need not be an appraisal).  The Guidance also includes discussions on, among other things, procedures an FSA should use to provide customers with proper advance notice of changes to HELOCs and treatment of borrower requests to reinstate credit privileges.