Banks freezing HELOC’s - legal or illegal?
October 3, 2008
There are about 60,000 homes for sale in the towns that make-up Maricopa County including Scottsdale, Fountain Hills, Mesa, Gilbert, Chandler and Peoria. Clearly, many Phoenix, AZ real estate owners are trying to sell their homes.
Yesterday, I received a telephone call from a reporter from a major national newspaper who is writing a story about the average American homeowner and their struggles. The focus of this story was the use of Home Equity lines by home owners and how they are cutting home equity lines or, in fact, banks are freezing home equity lines of credit in Phoenix.
Due to a variety of personal and national economic factors such as re-setting of adjustable rate mortgages, falling Phoenix real estate values, unemployment, the difficulty to re-finance, etc… many good, honest, and on-time paying borrowers are relying heavily upon their Home Equity Line of Credit (HELOC), to pay bills, even pay the monthly mortgage until the home sells.
In the last 30 days, the process of banks freezing home equity lines is accelerating. I have heard many stories recently of borrowers with 700+ FICO score, good income, assets and perfect payment history that are receiving brief letters in the mail that begin with “we are sorry to inform you……”.
Is this fair?, No. Is this legal?” you ask. Well, in the small print, somewhere in the middle of your home equity line of credit loan documents there is some language that reads that “(the banks) reserve the right to reduce or cut your home equity credit line of credit at their discretion”. Of course, they don’t mention that they will return the fees paid for originating the loan.
Although this provision is in the written words of the contract, I am questioning the fundamental legality.
I understand that the banks are in a credit crisis. It is their job to protect their shareholders from losses. However, borrowers are also going through a credit crisis. Now, the good paying borrower is suffering from poor lending practices.
I believe that broad cancellation of home equity lines is a form of redlining.
Redlining is “the practice of arbitrarily denying or limiting financial services to specific neighborhoods”.
Redlining is illegal and fundamentally immoral.
I want to urge Congress and the banking system to look closely at the practice of freezing credit lines on a sweeping basis without looking at each borrower.
If the borrower has the ability to keep their promise to pay, then banks must be accountable to keep their promise to lend.
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Copyright © James Wexler *Banks freezing HELOC’s - legal or illegal?*
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Very interesting take. I am interested to see if this idea will get some traction… I too, am hearing about many folks who have the ability to stay current and are getting their HELOC frozen.
Additionally, it is my understanding that when the lenders do this, it impacts the consumer’s FICO score since they are now essentially “using” 100% of the approved equity, thus making their debt ratios look a lot worse.
Great work.