Regulatory Guidance on Home Equity Lines of Credit (HELOCs) Nearing their End-of-Draw Periods

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In July 2014, the federal banking regulators issued guidance on HELOCs that are nearing the end of their draw period. As HELOCs end the draw period and enter an amortizing payment period or a balloon payment, banks may experience an increase in delinquencies as some borrowers struggle to meet the new payment schedules.

The guidance suggests that banks should address the following risk management principles:

  • Prudent underwriting for renewals, extensions and rewrites.
  • Compliance with existing guidance on credit risk management.
  • Well-structured terms for modifications.
  • Consideration of the reporting and disclosure requirements for any Troubled Debt Restructures (TDRs).
  • Addressing this segment of the portfolio in loan loss estimates.

The guidance also spells out ten more expectations around understanding the level of exposure, developing clear internal policies, communicating with borrowers, documenting the overall effect on loan loss estimates, and related topics. The FDIC’s announcement of the guidance is here.

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