Thursday, July 10, 2014 - Article by: Justin Fitzhugh - Nations Lending Corporation -
Major Federal Financial Institutions issued joint guidance regarding Home Equity Lines of Credit (HELOCs) that near the end-of-draw period. The guidance is intended to help us, lenders, manage our exposure, and teaches us how to respond whenever borrowers are unable to repay. The guidance lists the risk management principles we are required to use as we draft and implement our HELOCs end-of-draw period policies, and a guidance on the expectations from which we may draft and implement end-of-draw period procedures. The repetition of the end-of-draw period for this, and end-of-draw period for that may tune you off; however, I have simplified and divided the content of this guide to ease our familiarization with the requirements of the agencies that regulate us.
This, the first installment of my summary, covers the risk management principles the agencies require us to use are we draft, develop, and implement our HELOC risk management programs. The second installment, covers acceptable expectations we may use as we draft, develop, and implement our HELOCs end-of-draw period policies and procedures.
Although many borrowers are able to meet their contractual obligations when their HELOCs reset, some may face difficulties making payments or refinancing their existing loans. The Agencies recognize that under difficult circumstances, it is better for creditors and borrowers to work together and avoid default.
Our end of draw risk management program must embody the following five risk management principles:
I imagine most lenders are familiar with the risk management principles listed in the Interagency Guidance for HELOCs nearing their end-of-draw period. We are reminded of these principles through the various regulations and rules that govern the equity based lending, like the the recent ability to repay rule. I think the difference lies in the timing of the use of these principles which at the end of the day boil down to common sense lending and common sense management of financial hardship. History tells us there have been times when we shot ourselves in the foot by jailing debtors and/or provided financing to people who was unable to repay. I think it good practice that Federal agencies in charge of our financial systems remind us and help us develop good thinking as we issue equity based lending.
Here I have summarized the first part of the guidance; however, the guidance is loaded with important details and additional references to other official guidelines and rules that we should consider. You can access the guideline here: http://www.fdic.gov/news/news/press/2014/pr14052a.pdf
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