Federal and state regulatory
agencies have issued final guidance to financial institutions under their
jurisdiction regarding home equity lines of credit (HELOCs) that are nearing
their "end-of-draw" periods. A HELOC
is a dwelling-secured line of credit that
generally provides a draw
period for a borrower to access a revolving line of credit and typically
makes only interest payments. When this
period ends, borrowers can no longer draw on the
line of credit and the outstanding principal is either due immediately in a balloon payment
or repaid over the
remaining loan term through higher monthly payments.
The Federal Reserve, Office, of Comptroller of the
Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), National
Credit Union Administration (NCUA) along with the Conference of State Bank
Supervisors acknowledged that both financial institutions and borrowers may
face challenges brought about by the HELOC transition with some borrowers
experiencing difficulties with higher amortizing payments or a balloon
maturity. Many HELOCs were originated before
the housing crash and recession so homeowners may have seen changes in their
financial circumstances or declines in property values.
The guidance issued today describes core operating
principals governing management oversight of HELOCs during this period and
describes components of risk management.
It also highlights concepts related to financial reporting for HELOCs.
Regulatory agency examiners will review financial institutions
end-of-draw risk management programs for provisions addressing five risk
Prudent underwriting for renewals, extensions,
with pertinent existing guidance, including that in current regulatory
of well-structured and sustainable modification terms.
accounting, reporting, and disclosure of troubled debt restructurings.
segmentation and analysis of exposure in allowance for loan and lease losses (ALLL)
institutions should implement policies and procedures for managing HELOCS as
the draw period ends that are commensurate with the size and complexity of
Regulators expect risk management
procedures to include:
clear understanding of scheduled end-of-draw exposures and identification of
higher-risk segments. They should also profile
draw period transition dates for all HELOCS showing aggregate maturity schedules
and those of significant segments of performing and non-performing borrowers
including product types, post-draw payment characteristics, borrower
characteristics, and other segments where performance may vary.
full understanding of end-of-draw contract provisions. Transitions issues such as payment changes,
amortization options, debt consolidation options, and payment processing should
be controlled and programmed correctly into servicing systems
of near-term risks. Accounts that have
already had draws suspended because of borrower performance or collateral value
issues warrant attention. Management
should also evaluate borrowers making only the contractual minimum interest
payments to assess their ability to make the larger payments that will be
for contacting borrowers though outreach programs well before the schedule
end-of-draw, periodic follow-ups and effective response to issues.
the refinancing, renewal, workout, and modification programs are consistent
with regulatory guidance and expectations including consumer protection laws
Financial institutions must
insure that their regulatory reports and financial statements are prepared in
accordance with accepted standards and regulatory reporting instructions and
should fairly represent their condition and performance. Institutions must also comply with applicable
consumer protection laws such as the Equal Credit Opportunity Act, Truth in
Lending Act, and others relevant to HELOC lending.
The guidance says that even financial institutions
with moderate volumes of HELOCs nearing end-of-draw should direct borrowers to
trained consumer account representatives familiar with the products and the range
of alternatives available. Management
should establish and define clear loss mitigation steps so that well-trained
account representatives can quickly process requests.
Borrowers having financial difficulties should be
offered practical information explaining their options, general eligibility criteria,
and the process for applying for a modification. Such information should be clear, complete, and
Management should structure and distribute to all
involved personnel periodic reports to track end-of-draw actions and subsequent
account performance aggregate and by response type. Information should be sufficient to provide
timely feedback to management.
ALLL methodologies should consider
potential HELOC default risk
from payment shock, loss of line availability,
and home value changes. Higher-risk
borrowers who's HELOCs are nearing their end-of-draw
periods generally pose greater repayment risk for ALLL purposes, and
management should monitor them separately for appropriate consideration
in the ALLL estimation process.
Commensurate with the volume of the institutions HELOC
exposure, management should have quality assurance, internal audit, and
operational risk management functions that perform appropriate targeted testing
of the full process for managing end-of-draw transactions to confirm
information such as that draw terms and interest-only periods are not exceeded
without credit approval, staffing and resources are able to handle expected
volume, servicing systems are able to accurately calculate and process payments
and generate billing statements, borrower notifications are timely and in
compliance with contract terms and management guidelines, and reports provide reliable
and timely information.
While financial institutions with significant volumes of
HELOCS or higher risk exposure characteristics should have comprehensive systems
and procedures in place to monitor and assess their portfolios, regulators say
that institutions with small portfolios of HELOCs or lower exposures may be
able to use existing, less sophisticated processes.