A home equity line of credit (HELOC) frees up part of the excess equity in your house. Because your house is collateral, the interest on your withdrawals most likely is tax-deductible. When housing values were rising, lenders only had to be concerned with the continued credit-worthiness of the borrower. When they were falling, as happened in 2007 through 2009, lenders began reducing those lines to protect themselves from loss. As a result, the federal government enacted rules to protect the consumer.
The federal government reaffirmed the existing Truth In Lending Act that makes it illegal for a lender to demand payment in full on a HELOC unless the customer has lied on his application or perpetrated a fraud. Of course, a lender continues to have the right to terminate the agreement if the customer is past due. A lender can also protect himself from loss by disallowing new advances, lowering the line or changing the terms of payment. However, no lender can unilaterally raise the monthly payment scale on the loan. Even if it is the law, the federal government asks lenders to work with their customers to find ways to lower their risk.
Published by the Federal Reserve Board, this regulates when a lender can lower a customer's HELOC limits. Regulation Z says that the relationship between the house's equity and the HELOC it supports must be at least half of what it was at the time the customer was granted the loan. When a lender determines the lower value of the property, he may not use generally accepted figures. Rather, the lender must use local figures, although he will not be required to have an appraisal of the property.
Other Laws Governing HELOCs
While a lender can make certain that she will be paid back, she may not discriminate on the basis of the applicant's race, country of origin, sexual orientation or religion. Also, the lender may not exclude a property based on its location, sometimes called “redlining.” In addition, if a borrower's HELOC is reduced or her use is suspended based on what appears on her credit report, the lender is required to state that in what is called an “adverse action report.” Finally, a lender continues having the right to restrict the loan's usage if the financial circumstances of the borrower have materially changed.
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