We're setting up a program for freezing HELOCs based on using updated credit scores to identify a decline in the borrowers financial circumstances under Reg Z Section 1026.40(f)(3)(vi)(B).

Since we require a credit score of at least 660 to approve a HELOC, could we freeze HELOCs if the borrower's credit score drops below 660? This seems like it would be a reasonable basis to believe the borrower will be unable to fulfill the repayment obligation. But it might not necessarily be a "material" change if their initial credit score was only a few points above 660. Rather than using a certain threshold would we need to focus instead on how many points their credit score dropped to identify a "material" change?.

Thanks,

Larry

If you are doing this solely based on a credit score, you are going to end up in a world of hurt. Why would a credit score dropping to 659 signify a reasonable belief that someone was not going to pay their HELOC. Borrowers will pay loans secured by their house and will only default as a last resort. I would use a credit score maybe for support, but a determinative factor? I would not suggest it.

This seems like it would be a reasonable basis to believe the borrower will be unable to fulfill the repayment obligation.

I'm your ELC. Support that statement with supportive documentation the borrower does not have the means to repay his debt.


Better yet, I'm sitting behind the bench. Answer the borrower's attorney's question and provide the documentation they (the borrower) were unable to meet their payment obligations.

Sorry I'm so slow in circling back on this one. We require a credit score of 660 or above to grant a HELOC based on data from the credit bureau indicating default rates for each credit score. Since their data indicates a default rate above our risk appetite for credit scores below 660 it seemed to me that it was a valid criteria to use as the basis for the belief that the borrower will be unable to meet their obligation as part of the requirement under 1026.40(f)(3)(vi)(B). Do you to think that's not a valid basis?

How does merely a drop below 660 meet the two criteria for freezing a line?

In addition to permitting lenders to reduce or suspend credit limits following a significant decline in a property's value, Regulation Z also permits such actions if the "creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer's financial circumstances."8 The Official Interpretations state that two conditions must be met to use this situation as a basis for reducing or suspending a credit limit. First, there must be a "material change" in financial circumstances, for example, a significant decrease in a consumer's income.9 Second, as a result of that material change, the lender must have a "reasonable belief" that the consumer will not be able to meet his or her repayment obligations. Although the Official Interpretations go on to indicate that a lender may –– but need not –– rely on specific evidence, such as a failure to pay other debts, to conclude that a consumer will not be able to pay his or her HELOC obligation, institutions should have a factual basis for any actions taken under this provision. Furthermore, that factual basis should be determined consistently, to avoid the risk of prohibited discrimination or unfair practice.

https://www.fdic.gov/news/news/financial/2008/fil08058a.html

Yes, that was my concern. It only seemed to meet one of the two criteria, because it wouldn't necessarily be a material change for loans that had a credit score just above 660 when they were granted.

Would we meet both criteria under Regulation Z if we suspend accounts if the credit score dropped by a specified number of points? We would probably group the accounts into tiers based on their original credit scores. For example I'm thinking of a matrix that could look something like this:

Original Score --- Refreshed Score
> 780: Drop at least 60 points
779 - 740: Drop at least 50 points
720 – 739: Drop at least 40 points
700 – 719: Drop at least 30 points
660 – 699: Drop at lease 20 points
< 660: Drop at least 10 points

We would suspend accounts even if their refreshed credit score was above 660, but the higher the starting score the larger the drop would need to be.

Thanks,

You are going to have a hard time convincing me (maybe other will feel different) that solely a drop in a person's credit score of 10 to 60 points, or whatever you want to set it at means that there was been a material change in financial circumstances which would give you a reasonable belief that they will not be able to make their payment obligations. Now, if the customer was past due and there was a material drop and you talked to them about their situation, with proper documentation on what was causing the problem, then I think you could support it. I just don't think you are ever going to get there on score alone in 90% of the cases.

I'm with Randy here. Solely the credit score doesn't convince me that the borrower can't meet their obligations. What if the score dropped because they made a large purchase on a card (to get the cashback rewards) and their utilization spiked for one month, yet they repay it in full. Credit score dropped, but that's hardly proof that they can't repay.

It really seems like you need to know why the credit score dropped. If you find out they've lost their job and stopped paying bills, then it wasn't the credit score that caused you to freeze but the loss of income (which is both a material change and reasonable belief they won't be able to repay).

I do see value in using credit score as an indicator that you may need to do some digging in case something happened in the borrower's life which may cause them to be unable to repay. I just wouldn't freeze based strictly on the score.

Thanks for the feedback everyone. We're looking at using a decrease in credit score as the first cut then applying a second factor to better identify whether the decrease reflects a change that gives us a reasonable belief that the borrower will be unable to repay. Because of our volume of HELOCs it needs to be something that doesn't require manual loan level investigations, so we're looking into getting refreshed delinquency information from the credit bureaus on a periodic basis for this.