Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods
The federal financial institutions regulatory agencies in conjunction with the Conference of State Bank Supervisors recently issued an interagency guidance for financial institutions who offer home equity lines of credit (HELOC). This guidance acknowledges that many borrowers may have difficulty managing the payment of their HELOC as they near the full repayment period. It stress the importance of lenders clearly and effectively communicating with borrowers and prudently managing exposures in a disciplined manner. With this in mind, the guidance advises financial institutions and borrowers to work together to avoid unnecessary defaults.
So what can a credit union do to ensure they are doing their part to avoid unnecessary defaults?
The guidance provides five end-of-draw risk management principles that should be followed as part of the supervisory process and utilized when reviewing end- of-draw risk management program provisions. These principles include:
- Prudent underwriting for renewals, extensions, and rewrites;
- Compliance with pertinent existing guidance, including but not limited to Credit Risk Management Guidance for Home Equity Lending and the Interagency Guidance for Rel Estate Lending Policies;
- Use of well-structured and sustainable modification terms;
- Appropriate accounting, reporting, and disclosure of troubled debt restructuring; and
- Appropriate segmentation and analysis of end-of-draw exposures in allowance for loan and leases losses (ALLL) estimation processes.
In addition to the five risk management principles, the guidance provides expectations for prudent risk management. The guidance directs management to ensure they “implement policies and procedures for managing HELOCs nearing their end-of-draw periods that are commensurate with the size and complexity of the portfolio.” The expectations include:
- Developing a clear picture of scheduled end-of-draw period exposures;
- Ensuring a full understanding of end-of-draw contract provisions;
- Evaluating near-term risks;
- Contracting borrowers through outreach programs;
- Ensuring that refinancing, renewal, workout, and modification programs are consistent with regulatory guidance and expectations, including consumer protection laws and regulations;
- Establishing clear internal guidelines, criteria, and processes for end-of-draw actions and alternatives (renewals, extensions, and modifications);
- Providing practical information to higher-risk borrowers;
- Establishing end-of-draw reporting that tracks actions taken and subsequent performance;
- Documenting the link between ALLL methodologies and end-of-draw performance; and
- Ensuring that control systems provide adequate scope and coverage of the full end-of-draw period exposure.
The guidance is very clear that the principles and expectations presented in this document may vary in their implementation based on the number of HELOCs a financial institution handles. The guidance states “Financial institutions with a significant volume of HELOCs, portfolio acquisitions, or exposures with higher-risk characteristics generally should have comprehensive systems and procedures to monitor and assess their portfolios. Community banks and credit unions with small portfolios of HELOCs, few portfolio acquisitions, or exposures with lower-risk characteristics may be able to use existing less-sophisticated processes.”
For more information please review the guidance in its entirety: http://www.ncua.gov/News/Press/NW20140701-HELOC-Guidance.pdf