Compliance Question of the Week

We had to reduce the credit line on a member’s home equity line of credit (HELOC) because the value of the collateral has significantly dropped. What notice should I send to the member about this?

In the end, it really comes down to three words: adverse action notice. And here’s why:
 
We’ll start with the Reg Z notice requirement when making these types of changes. The requirement comes from 226.9(c)(1)(iii):

  • (iii) Notice to restrict credit. For home-equity plans subject to the requirements of §226.5b, if the creditor prohibits additional extensions of credit or reduces the credit limit pursuant to §226.5b(f)(3)(i) or (f)(3)(vi), the creditor shall mail or deliver written notice of the action to each consumer who will be affected. The notice must be provided not later than three business days after the action is taken and shall contain specific reasons for the action. If the creditor requires the consumer to request reinstatement of credit privileges, the notice also shall state that fact.

The references to 226.5b are:

  • (3) Change any term, except that a creditor may:
    • (i) Provide in the initial agreement that it may prohibit additional extensions of credit or reduce the credit limit during any period in which the maximum annual percentage rate is reached. A creditor also may provide in the initial agreement that specified changes will occur if a specified event takes place (for example, that the annual percentage rate will increase a specified amount if the consumer leaves the creditor’s employment); and
    • (vi) Prohibit additional extensions of credit or reduce the credit limit applicable to an agreement during any period in which:
      • (A) The value of the dwelling that secures the plan declines significantly below the dwellings appraised value for purposes of the plan;
      • (B) The creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer’s financial circumstances;
      • (C) The consumer is in default of any material obligation under the agreement;
      • (D) The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement;
      • (E) The priority of the creditor’s security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; or
      • (F) The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice.

Reg Z does not have any specific format for the notice. Just provide notice of the action and the specific reasons for the action.

Now we get over to Reg B, or the Equal Credit Opportunity Act (ECOA), and the requirements for adverse action notices.

Reg B requires you to provide adverse action notices per 202.9 within 30 days of taking an adverse action upon an existing account. Reducing, freezing and closing a HELOC would all be considered an adverse action. The notice requirement for the adverse action is:

  • (2) Content of notification when adverse action is taken. A notification given to an applicant when adverse action is taken shall be in writing and shall contain a statement of the action taken; the name and address of the creditor; a statement of the provisions of §701(a) of the Act; the name and address of the federal agency that administers compliance with respect to the creditor; and
  • A statement of specific reasons for the action taken.

Notice a similarity here between the Reg Z and Reg B requirements?

The C-1 model adverse action form is the most common notice used by credit unions. The form has a section for “Description of Action Taken” and multiple choices under Part I for “Principal Reason” the action was taken.

Indicating “value of type of collateral not sufficient” would cover cases in which the property value is declining. Be sure to include credit score data on the adverse action notice if you used the credit score in any way in making the determination to reduce the HELOC.

If you can get the adverse action notices sent out no later than 3 days after the action was taken, you would fulfill both the Reg Z and Reg B requirements.

Related Links
12 CFR 202.9

12 CFR 226.9

 

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance.