The Conference of State Bank Supervisors and the federal financial institutions regulatory agencies provided guidelines to financial institutions for home equity lines of credit (HELOC) that are close to the end of the withdrawal period (also known as the “end-of-draw” period). This guidance will help both lenders and consumers transition when it’s time to pay off the credit line.
A HELOC is a line of credit secured by the equity in your home. Generally, it has a draw period and then a repayment period. While you are in the draw period, you have revolving access to the unused portion under a specific line of credit. Usually, during the time of withdrawal you will be required to only pay interest.
However, during the repayment period, you will not be able to draw from the line of credit. The outstanding principal is due immediately in a balloon payment or it is repaid over the remaining loan term.
Under the guidelines, financial institutions are being urged to notify borrowers about the line of credit’s upcoming reset. The guidelines also offer direction on effectively managing the risks that come with a HELOC.
Here are a few of the steps regulators presented to lenders in an effort to assist consumers with the HELOC transition:
More consumers will receive follow-up: Lenders are being asked to contact borrowers in advance of their end-of-draw period in order to follow-up and handle any issues that might come up. The suggested time period is at least six to nine months or more before the HELOC repayment period.
Lenders are encouraged to make sure consumers understand end-of-draw contract provisions: For example, financial institutions are urged to be well-versed in available options such as extensions or interest rate locks.
Lenders are urged to make sure refinancing, renewal, workout, and modification programs adhere to regulatory guidelines and take into account consumer protection laws and regulations. They are also encouraged to work with higher-risk borrowers in an effort to help them avoid default.