Inter-Agency Guidance Issued for HELOCs Nearing the End-of-Draw Periods
July 8, 2014
July 8, 2014
The National Credit Union Administration (NCUA) along with four other federal financial regulatory agencies and the Conference of State Banks Supervisors (CSBS) issued guidance to financial institutions regarding home equity lines of credit (HELOCs) that are nearing the end of their draw period. The agencies and CSBS recognize that financial institutions and borrowers may face financial challenges as HELOCs near the end-of-draw periods.
The Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods describes how financial institutions can effectively manage their potential exposures under these circumstances. The guidance promotes an understanding of potential exposures and describes consistent, effective 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.
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 10 key components:
- Developing a clear understanding of scheduled end-of-draw period exposures. 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.
- 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.
- Evaluating near-term risks. Consider whether the 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 the borrower making only minimum interest-only payments.
- Contacting borrowers through outreach programs. Begin reaching out to members at least to establish contact, engage in periodic follow-up with borrowers, and respond effectively to issues.
- Ensuring that refinancing, renewal, workout, and modification programs are consistent with regulatory guidance and expectations, including consumer protection laws and regulations. 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.
- Establishing clear internal guidelines, criteria, and processes for end-of-draw actions and alternatives (renewals, extensions, and modifications). 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.
- Providing practical information to higher-risk borrowers. Credit unions that provide loan modifications of other options should provide information that explains the basic options available, general eligibility criteria and the process for requesting a modification.
- Establishing end-of-draw reporting that tracks actions taken and subsequent performance. 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.
- Documenting the link between ALLL methodologies and end-of-draw performance. ALLL methodologies should consider potential HELOC default risk from payment shock, loss of line availability, and home value changes.
- Ensuring that control systems provide adequate scope and coverage of the full end-of-draw period exposure. 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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State law requires that every aspect of disposition of collateral, including the method, manner, time, place, and other terms be “commercially reasonable.” If commercially reasonable, the credit union may sell the vehicle by public or private proceedings. Another requirement is notification of certain people before any sale can take place. This includes the debtor and any secondary obligor.
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