some borrowers may face challenges as home equity lines of credit (HELOC) near
their end-of-draw periods, the five federal financial institutions regulatory
agencies, along with the Conference of State Bank Supervisors, issued
interagency guidance describing examiners’ management expectations.
Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods
describes 10 components of a risk management program that promotes an
understanding of potential exposures and consistent, effective responses to
HELOC borrowers who may be unable to meet contractual obligations. See also CompBlog post: HELOC End-of-Draw Risk Management Principles.
A credit union’s
policies and procedures should be commensurate with the size and complexity of
its HELOC portfolio. Examiners’ expectations of a prudent risk management
a clear understanding of scheduled end-of-draw period exposures and identify
higher-risk segments of the HELOC portfolio.
The Guidance recommends credit unions refer to the Interagency
Junior Lien Allowance Guidance for further information on account and
a full understanding of end-of-draw contract provisions. Transition issues such as payment changes,
interest rate options, amortization terms, lockout and debt consolidation
options, and payment processing should be controlled and programmed correctly
into servicing systems.
near-term risks to determine whether borrower will meet current underwriting standards
or qualify for renewal programs. Such
risks may include the decline of the collateral value, borrower repayment
performance problems or borrower making only minimum interest-only payments.
six to nine months before end-of-draw dates, contacting borrowers through
outreach programs to engage in periodic follow-up and respond effectively to
that refinancing, renewal, workout, and modification programs are consistent
with regulatory guidance, regulations and consumer protection laws. Credit
unions must ensure regulatory reports and financial statements are prepared in
accordance with generally accepted accounting principles and regulatory
reporting instructions. Credit unions must also comply with applicable consumer
protection laws, such as the Equal Credit Opportunity Act, the Fair Housing
Act, RESPA, the Servicemembers Civil Relief Act, Truth in Lending and federal
and state prohibitions against unfair or deceptive acts or practices.
credit unions with moderate volumes of HELOCs nearing their end-of-draw periods
should direct borrowers to trained member account representatives familiar with
the characteristics of the products, the borrower, and the range of alternatives
available. Management should establish and define clear loss mitigation steps, such
as monthly payment targets, documentation requirements, and the order of
practical information to higher-risk borrowers, such as basic options available,
general eligibility criteria, and the process for requesting a modification.
should structure and distribute end-of-draw period reports to allow all involved
personnel to understand and respond to exposures, activity, and performance
results. Reporting should be frequent
and contain a sufficient amount of detailed information.
for loan and lease losses (ALLL) methodologies should consider potential HELOC
default risk from payment shock, loss of line availability, and home value
10. Commensurate with the volume of the credit
union’s HELOC exposure, management should have quality assurance, internal
audit, and operational risk management functions perform appropriate targeted
testing of the full process for managing the end-of-draw transactions. Even
when a credit union outsources all or a portion of the HELOC management, the
credit union remains responsible for ensuring that the service provider
complies with applicable laws, regulations and supervisory guidance.
to the Guidance, credit unions with small HELOC portfolios, few portfolio
acquisitions, or exposures with lower-risk characteristics may be able to use
existing less-sophisticated processes.