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Released: August 21, 2008
Help Desk FAQ
Home Equity Loans
What can I do if my home equity line has been reduced or frozen?
The Federal Deposit Insurance Corporation (FDIC) offers some advice to people in this position.
Contact your lender if you're facing a major cash shortage as a result of its decision. Inform your bank that you will experience financial hardship or significant inconvenience as a result of a reduction or suspension of your credit limit. For example, if you rely on a line of credit to fund a home renovation or make a college tuition payment, ask for assistance in finding an alternate source of financing.
Ask the bank to reconsider if your home's value has declined less than other properties in your area. If, for example, the lender's decision relied heavily on information about property sales for your city, but your home's value has held up better than the average — and you can back that up, perhaps by paying for a new, independent appraisal of your home — you may be able to get the lender to reconsider. Be aware, however, that your appeal might not be successful.
Make sure your home equity lender knows if you have significantly reduced the balance on your first mortgage. If you made larger-than-usual payments on your first mortgage, you may be a lower risk to your home equity lender, who may not be aware of that development.
Shop around for a new line of credit, but be prepared for a challenge. You may find a lender willing to provide an attractive HELOC based on your credit rating and the equity you've built up in your home, but that could take longer than in the past, especially with mortgage foreclosures rising and real estate values falling in many areas.
Remember that home equity borrowers have rights under federal laws and rules. In particular, the Truth in Lending Act permits a lender to reduce or suspend a consumer's credit limit if there's been a significant decline in property value or a material change in the borrower's financial circumstances (such as a significant decrease in income). However, the law also requires the lender to provide written notice to each borrower not later than three business days after the action is taken and to include specific reasons for the action. The letter should also provide information on how to appeal.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating on the basis of race, gender or other specified factors. And the Federal Trade Commission Act prohibits banks from engaging in unfair or deceptive practices in all aspects of a loan transaction, including servicing and collections.
If you think you're being treated unfairly and you can't resolve a problem directly with the institution, consider contacting its government regulator. The FDIC and other banking regulators may be able to help by providing information about your consumer rights or by contacting an institution that doesn't appear to be responding to your complaint. In addition, a regulator also can seek corrective action if an institution is in violation of a federal law or regulation.
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