Interest-Only HELOCs Permissible for FCUs

ALEXANDRIA, Va.-In a recent legal opinion letter (05-0135), NCUA Associate General Counsel Sheila Albin clarified that federal credit unions may offer members interest-only home equity lines of credit. According to the letter, the Indiana Credit Union League inquired whether a federal credit union was permitted to make a home equity line of credit with a 10-year draw period, during which the member was only required to make interest payments; after that time, the member pays the outstanding principal and interest over a five-year period. “The Federal Credit Union Act expressly permits FCUs to make loans to members in the form of lines of credit and provides for repayment and amortization in accordance with NCUA regulations,” Albin wrote. “NCUA regulations provide that the amortization of a line of credit balance “shall be as determined by contract between the Federal credit union and the member/borrower.” Thus, an FCU may enter into a loan agreement to receive interest-only payments for a line of credit.” NCUA also said that borrowers have the option to pay on the principal during the 10-year period as well, though not required, without prepayment penalty. “An FCU should consider whether interest-only payments are appropriate in its loan program based on a risk management analysis,” Albin concluded.