According to a report issued by The Office of the Comptroller of the Currency, between 2014 and 2017, significant volumes of Home Equity Lines of Credit (“HELOC”) will transition from the “draw period” (during which borrowers typically make interest-only payments)to the “repayment period” (during which a borrower is required to repay the outstanding interest and principal balance).
In light of this impending slew of HELOC transitions, on July 1, 2014, several state and federal regulatory agencies issued interagency guidelines advising financial institutions to be more proactive in “prudently manage exposures in a disciplined manner” and urging them to work with borrowers in order to avoid defaults.
To manage the risk of HELOCs entering the repayment period, the new guidelines encourage financial institutions to adhere to the following ten principles:
1) Develop a clear picture of scheduled end-of-draw period exposures;
2) Ensure a full understanding of end-of-draw contract provisions;
3) Evaluate near-term risks;
4) Contact borrowers through outreach programs;
5) Ensure that refinancing, renewal, workout, and modification programs are consistent with regulatory guidance and expectations, including consumer protection laws and regulations;
6) Establish clear internal guidelines, criteria, and processes for end-of-draw actions and alternatives (e.g. renewals, extensions, and modifications);
7) Provide practical information to higher-risk borrowers;
8) Establish end-of-draw reporting that tracks actions taken by the financial institution and subsequent performance;
9) Document the link between allowance for loan and lease losses (ALLL) methodologies and end-of-draw performance; and
10) Ensure that control systems provide adequate scope and coverage of the full end-of-draw period exposure.
The agencies further note that adherence to these ten principles should assist lenders in developing a more proactive response to borrowers who cannot meet their contractual obligations as their HELOCs transition into the repayment period.