WASHINGTON (7/2/14)--The National Credit Union Administration, along with other federal financial regulatory agencies and the Conference of State Bank Supervisors, issued guidance Tuesday regarding home equity lines of credit (HELOCs).
The guidance concerns HELOCs nearing the "end-of-draw" period, which is when the principal amount of the line of credit must begin to be repaid. The guidance encourages financial institutions to communicate with borrowers about the pending reset and provides principles for managing risk as HELOCs reach their end-of-draw periods.
These risk-management principles are:
- Prudent underwriting for renewals, extensions, and rewrites;
- Compliance with pertinent existing guidance, including but not limited to the Credit Risk Management Guidance for Home Equity Lending and the Interagency Guidelines for Real Estate Lending Policies;
- Use of well-structured and sustainable modification terms;
- Appropriate accounting, reporting, and disclosure of troubled debt restructurings; and
- Appropriate segmentation and analysis of end-of-draw exposure in allowance for loan lease losses estimation processes.
As borrowers near their end-of-draw periods, many will continue to meet their obligation when their loan resets to an amortizing payment or reaches a balloon maturity; however some may find it difficult to make higher payments or to refinance their existing loans due to changes in their financial circumstances or declines in property values.
The guidance offers how financial institutions can understand and effectively manage potential exposures under these circumstances and descibes responses to HELOC borrowers unable to meet their contractual obligations. The appropriate accounting and reporting procedures for HELOCs nearing their end-of-draw periods are also discussed.
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