Home equity line of credit or HELOC have been very convenient for many people. When people opted for consolidation of debts there was no better way but to apply for a HELOC. Now the situation is such that banks and financial institutions do not have money to let people borrow money through their credit lines. The new government has granted billion of funds but the financial institutions and banks are unwilling to spend it on credit lines. The main reason is that they want to avoid getting into trouble once again. The customers are in a very bad financial situation. Thus there is no guarantee that the money they borrow through credit lines would be repaid back.
With home values falling lenders have resorted to cutting credit limits on home equity loans and credit lines. Home owners are being caught unawares and some have been forced to cancel remodeling, and other such plans. But seems that lenders cannot reduce or withdraw credit lines legally.
Recently a Cleveland law firm filed a class action lawsuit against a mortgage company in the country. The lender had slashed the customer’s home equity lines of credit. These credit lines have to be maintained by paying annual fees to the lender. The lender in this case the mortgage company had suspended the use of the customer’s lines of credit on the basis if the real estate trends. Moreover the customer was not reappraised before the suspension.
The Truth in Lending Act, Regulation Z determines the lender’s right to either suspend or cancel home equity line of credit. Under this act there are three situations outlined which can lead to cancellation of the customer’s privileges. These are
- Significant decline in home value.
- Change in financial situation of borrower making it clear to the lender that be might not be able to meet financial obligation.
- Borrower has been defaulting the HELOC agreement.
Thus if the home value falls to such an extent that difference between credit limit and equity available on the house is halved then the lender has the right to modify the credit limit.
According to Regulation Z the lender in not required to re appraise the property. But the lender should have facts to back his changes to home equity lines of customers. This regulation actually gives the banks and financial institutions complete freedom to either suspend or restrict the home equity lines of credit of customer if he is convinced. The legal case mentioned above is more complicated since the banks charge annual fees for the service and maintenance of HELOC and the bank also went ahead and suspended credit lines on the basis of fall in home prices without even appraising the value of property individually. The customer in the case mentioned actually claims that his property value has increased rather than decreased. Thus the case still not solved.
There should be more clarity as to the actions that banks can take so that customers are prepared. The outcome of the case might decide the home equity practices in the future.
