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Thursday, June 1, 2017

Home Equity Plans – Credit Limits

QUESTION
We offer home equity plans in our loan product selection. In some instances, we want to prohibit the consumer from increasing credit. We may also want to reduce the credit limit. When are we allowed to prohibit a consumer from increasing the credit limit under a home equity plan? When can we reduce the credit limit? Can we specify the default requirement to prohibit credit extensions?

ANSWER
This question has some complicated factors that impact a comprehensive answer. 

However, it is possible to outline six bases where a creditor may prohibit the consumer from increasing the credit limit or the creditor may reduce the credit limit in any given period where:
  1. The value of the dwelling securing the plan declines significantly below the dwelling’s appraised value for purposes of the plan;
  2. The creditor reasonably believes the consumer will be unable to fulfill the repayment obligations of the plan due to a material change in the consumer’s financial situation;
  3. The consumer is in default of any material obligation under the agreement;
  4. The creditor is precluded by government action from imposing the APR provided for in the agreement;
  5. The priority of the creditor’s security interest is adversely affected by government action so that the value of the security interest is less than 120% of the credit line; or
  6. The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice. [12 CFR § 226.5b(f)(3)(vi)]
With respect to a default, a creditor may specify events that would qualify as a default of a material obligation for purposes of the ability to prohibit additional extensions of credit or reduce the credit limit applicable to an agreement for a home equity plan. [12 CFR Supplement I to 226, Official Staff Commentary § 226.5b(f)(3)(vi)-8]

Jonathan Foxx
Managing Director
Lenders Compliance Group