Notice for Frozen HELOC- Inactivity/Delinquency

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Question:

Are we correct that we do not have to send an adverse action notice in the event we freeze a HELOC for “inactivity, default, or delinquency” of the account? Do we need to send a notice to restrict credit? If so, is there sample language? We have not been able to find an example of this notice. (c)Change in terms - (1)Rules affecting home-equity plans - (i)Written notice required. For home-equity plans subject to the requirements of § 1026.40, whenever any term required to be disclosed under § 1026.6(a) is changed or the required minimum periodic payment is increased, the creditor shall mail or deliver written notice of the change to each consumer who may be affected. The notice shall be mailed or delivered at least 15 days prior to the effective date of the change. The 15-day timing requirement does not apply if the change has been agreed to by the consumer; the notice shall be given, however, before the effective date of the change. (ii)Notice not required. For home-equity plans subject to the requirements of § 1026.40, a creditor is not required to provide notice under this section when the change involves a reduction of any component of a finance or other charge or when the change results from an agreement involving a court proceeding. (iii)Notice to restrict credit. For home-equity plans subject to the requirements of § 1026.40, if the creditor prohibits additional extensions of credit or reduces the credit limit pursuant to § 1026.40(f)(3)(i) or (f)(3)(vi), the creditor shall mail or deliver written notice of the action to each consumer who will be affected. The notice must be provided not later than three business days after the action is taken and shall contain specific reasons for the action. If the creditor requires the consumer to request reinstatement of credit privileges, the notice also shall state that fact.

Answer:

Answer by Dan Persfull:

Inactivity is not one of the allowable reasons to suspend or terminate draws on a HELOC. See 1026.40(f) .

If you suspend or terminate draws on a HELOC you must provide the notice under the section of 1026.40 you cited above.

Below is a sample we've used. The letter also contains a second page that has the required ECOA and FCRA notices. You can edit the letter as needed.

This letter is to inform you that effective immediately all credit advance privileges for your Home Equity Line of Credit have been suspended.

This suspension is based on your inability to acquire homeowners/hazard insurance for property located at Address, which is collateral for your Home Equity Line of Credit account with The Peoples State Bank. Because homeowners/hazard insurance is required, the bank purchased insurance for your property to cover the bank’s interest.

For your reference, this suspension is being imposed under the provisions of the Home Equity Line of Credit Mortgage Agreement executed by you on Date, more specifically, Section 12 of the agreement and Section 19 of the Mortgage regarding maintaining insurance on the property.

In order to reinstate your credit privileges under the original terms of the agreement, you must send us a written request to that effect. Your credit privileges will only be reinstated if we determine that the condition which caused us to prohibit additional extensions of credit no longer exists and that none of the other provisions for suspension under Section 12 of the Home Equity Line of Credit Mortgage Agreement and Section 19 of the Mortgage regarding maintaining insurance on the property exists. If appraisal or credit report fees are incurred in making the determination, we may (if allowed by applicable law) charge you such fees.

Answer:

Answer by Jim Bedsole:

Dan, I agree with your response, but let me throw out a curve ball regarding your statement of inactivity not being an allowable reason. Suppose a bank included in its contract requirements for HELOCs that a consumer must make at least one draw from the line in any calendar year where there was an available balance to draw. I'm not aware of anything that would prohibit such a contractual requirement. If such requirement was included, then could failure to make such a draw be considered default of any material obligation under the agreement as stipulated in 1026.40(f)(3)(vi)(C)?

Answer:

Answer by Randy Carey:

I think you would be hard pressed to classify the requirement to make a draw as a material obligation.

Additionally,

Paragraph 40(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 §1026.40(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 §1026.40(f)(2).

Answer:

Answer by Dan Persfull:

I'm not sure I would consider that a material obligation but if allowable and it was specifically agreed to in the original agreement then it may be cause for suspension or termination but I would highly recommend consulting with legal counsel before adding and/or taking any adverse action on such a clause in the agreement.