With mortgage values decreasing steadily, my bank is creating an action plan on HELOC's to freeze the lines for those "high risk" loans which now exceed the 80% LTV originally approved, based on the declines, and other factors. Two compliance questions:

1. Our disclosure indicates we can reduce or suspend based on decreased values, so will be sending an adverse action notice to the customer. Do we need to give them notice prior to doing so, or is the AAN enough?

2. Management wants to also make DDA balances with the bank as a factor in deciding whether to freeze/suspend the line? This seems to me to present a fair lending issue because this was not part of the criteria by which the loan was initially underwritten. Am I correct or is this acceptable to do so?

Bump--anyone have any inspiration on this? I am concerned about fair lending with #2.

In regards to item 1 I received a letter from my second lien holder advising me they were reducing my credit limit on my HELOC by $29,000 based on a recent evalutation done on my house.

No advance notification just a letter stating it was already done.

1. You will have to perform an evaluation on each property. You can't just arbitrarily say the property has declined in value. What caused it to decline? If you freeze the line then you will need to send the AAN. And if I have a 75% LTV and my protected class neighbor got a 85% LTV and both our properties are identical and their values have declined are you going to freeze or reduce my line also? Both our values have declined.

2. DDA balances are not one of the allowable criteria allowed in Reg. Z to consider freezing or reducing the line. If you want to use it do show a decline in the borrower financial condition then again you will have to document the decline. Just because your DDA balance has declined does not mean a DDA balance at another FI has not increased.

Review the Commentary to 5b(f)(3)(vi).

Staff Interpretation Paragraph 5b(f)(3)(vi)reads as follows:

2. Temporary nature of suspension or reduction. Creditors are permitted to prohibit additional extensions of credit or reduce the credit limit only while one of the designated circumstances exists. When the circumstance justifying the creditor's action ceases to exist, credit privileges must be reinstated, assuming that no other circumstance permitting such action exists at that time.

In light of the way the Staff has positioned reductions of freezes as a temporary suspension or reduction, if the borrower requests that the reduction/freeze be lifted, and we disagree, do you think an AAN is required? Not clear as to whether the request to lift the freeze falls withing the adverse action definition of (iii) A refusal to increase the amount of credit available to an applicant who has made an application for an increase

Whether a lender can reduce the credit limit because of a downturn in the real estate market is debatable at best. The basis for reducing the lending limit is the "conumer's action or inaction" and not the actions of a third party. The commentary states:
5b(f)(3)(vi)… “A creditor may prohibit additional extensions of credit or reduce the credit limit in the circumstances specified in this section… 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).
Paragraph 5b(f)(2)(iii)… 1. Impairment of security. A creditor may terminate a plan and accelerate the balance if the consumer's action or inaction adversely affects the creditor's security for the plan, or any right of the creditor in that security. Action or inaction by third parties does not, in itself, permit the creditor to terminate and accelerate.

A downturn in the real estate market could not be relied upon in and of itself to reduce or freeze the line. The value of the dwelling that secures the line must decline significantly below the dwellings appraised value for a reduction or freeze to occur. 226.5b(f)(3)(vi)(A) Consumer action or inaction not required under these circumstances to freeze or reduce the line.

I may have read too much into 5b(f)(2)(iii)...