Federal and state financial regulators recently issued guidance for financial institutions on home equity lines of credit nearing their “end of draw” periods. The guidance, which was released as a wave of HELOCs are transitioning to full repayment phases, notes that some HELOC customers may have difficulty making a balloon payment or meeting higher monthly payments. It was suggested by the regulators that management should participate in or establish workout and modification programs where feasible. To properly manage risks associated with such HELOCs, financial institutions are to sketch out a full picture of their exposures, ensure that customers adequately understand their obligations and options, train customer service personnel to work with HELOC customers, and establish clear internal policies and reporting for end-of-draw modifications.
The agencies will be reviewing institutions’ risk management programs for HELOC end-of-draw periods to ensure they cover prudent underwriting measures, compliance with existing guidance, sustainable modification terms, appropriate account and reporting of modifications, and estimates of the allowance for loan and lease losses.