Customers come to us asking to increase their line of credit. We want to start doing this as a loan modification. Our underwriter will still verify employment and property value.

Does anyone else do this?

We will give them a right to rescind for the new money. We would still provide an adverse action notice if the customer is denied an increase.

According to RESPA, a transaction is exempt if there will not be a new note. However, there will be another lien placed on the property referencing the original transaction. Does this make it a new loan for RESPA?

I’m thinking this should be treated as a new loan for Reg Z. They will be applying for the increased line, so I think we should provide the initial disclosures again.

Would this be a new loan for HMDA? I see this being a potential problem if it is because there won’t be a new loan number and it’s possible that all or part of the original loan was used for home improvements and reported, and part or all of the line increase may be used for home improvements as well.

Any comments or input would be appreciated. Thank you.

If you are changing no other terms other than the LOC, then I don't see it as a new loan. Commentary to 226.5b(f)(3)(iii)

My question is the opposite. If you are decreasing the line (nothing else changes in the agreement), do you have to do a change in terms or could you just send an adverse action notice?

Why are you decreasing the LOC?

Paragraph 5b(f)(3)(iii)

By contrast, a consumer could agree to a new credit limit for the plan, although the agreement could not permit the creditor to later change the credit limit except by a subsequent written agreement or in the circumstances described in §226.5b(f) (3)(vi).

Paragraph 5b(f)(3)(vi)

1. Suspension of credit privileges or reduction of credit limit. A creditor may prohibit additional extensions of credit or reduce the credit limit in the circumstances specified in this section of the regulation. In addition, as discussed under §226.5b(f)(3)(i), a creditor may contractually reserve the right to take such actions when the maximum annual percentage rate is reached. A creditor may not take these actions under other circumstances, unless the creditor would be permitted to terminate the line and accelerate the balance as described in §226.5b(f)(2). The creditor's right to reduce the credit limit does not permit reducing the limit below the amount of the outstanding balance if this would require the consumer to make a higher payment.

I probably should have done this first, but I went back and read our HELOC agreement and it does provide the circumstances under which the line can be reduced. So if the bank reduces the line based on one of those circumstances, would we then just send an adverse action indicating the reason for the reduction? Thank you.

We have a separate "Notice of Reduction of Credit Limit/Prohibition of Additional Extensions of Credit" form, basically it tells them what the credit line has been reduced to and why.

Quote:

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would we then just send an adverse action indicating the reason for the reduction?

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Yes. This would advise your borrower the what and why of what you are doing. We don't have a form such as MNJill mentioned, but it sounds like it would be an useful one.

It is actually a Bankers Systems form, it is called a Home Equity Freeze notice, works for lowering credit limit or not allowing any furture advances.