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Comp Blog

New Guidance Part 2: Policies and Procedures for HELOC End-of-Draw Risk Management

By: Danielle Wright

CommentTuesday - July 1, 2014

Concerned that 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.

The Interagency 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 program include:  

1.    Developing 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 portfolio management.  

2.    Ensuring 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.

3.    Evaluating 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.

4.    Beginning six to nine months before end-of-draw dates, contacting borrowers through outreach programs to engage in periodic follow-up and respond effectively to issues.

5.    Ensuring 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.

6.    Even 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 modification steps.

7.    Provide practical information to higher-risk borrowers, such as basic options available, general eligibility criteria, and the process for requesting a modification.

8.    Management 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.

9.    Allowance for loan and lease losses (ALLL) methodologies should consider potential HELOC default risk from payment shock, loss of line availability, and home value changes.

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.

According 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.          






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