NCUA, Federal Regulators Issue Credit Risk Management Guidance for HELOCs

ALEXANDRIA, Va. – Home equity lines of credit have become increasingly attractive to consumers in the current environment of rising home values and continued low interest rates, and their growing popularity have also raised red flags among federal regulatory agencies enough for them to issue guidance on sound risk management practices for home equity lines of credit and loans. According to a joint release issued by NCUA, the Federal Reserve System, FDIC, Office of the Comptroller of the Currency, and the Office of Thrift Supervision, “the agencies have found that in some cases credit risk management practices for home equity lending have not kept pace with the product’s rapid growth and eased underwriting standards.” “The rise in home values, coupled with low interest rates and favorable tax treatment, have made home equity lines of credit and loans attractive to consumers. To date, delinquency and loss rates for home equity portfolios have been low, due at least in part to the modest repayment requirements and relaxed structures of this lending. However, the agencies have identified risk factors that, along with vulnerability to interest rate increases, have attracted scrutiny,” the agencies stated. Among the factors noted are: * interest-only features that require no amortization of principal for a protracted period; * limited or no documentation of a borrower’s assets, employment and income; * higher loan-to-value and debt-to-income ratios; * lower credit risk scores for underwriting home equity loans; * greater use of automated valuation models and other collateral evaluation tools for the development of appraisals and evaluations; and * an increased number of transactions generated through a loan broker or other third party. In their guidance, the regulatory agencies noted that “active portfolio management is especially important for financial institutions that project or have already experienced significant growth or concentrations in high risk products, such as high LTV, limited documentation and no documentation interest-only, and third-party generated loans.” “Like most other lending activity, home equity lending can be conducted in a safe and sound manner with appropriate risk management systems. This guidance outlines the agencies’ expectations for sound underwriting standards and effective credit risk management practices for a financial institution’s home equity lending activity,” they stated. -