Freezing Customers' HELOC accounts

More lender liability suits are headed towards banking officials alleged to have violated the Truth-in-Lending Act. New claims and accusations involve reducing or suspending millions of dollars of Home Equity Lines of Credit (HELOC) accounts by falsely claiming that property values had dropped in various demographics.

Similar class action filed in federal district court in Los Angeles asserted claims against the banks.  An article posted on Seattle's King5.com reported that in the Los Angeles case, the banks are accused of relying on flawed automated valuation models to intentionally understate home values and create a pretext for freezing customers' HELOC accounts.  

Banks are rarely questioned upon reducing a HELOC account or initiating a freeze in certain situations. A consumer default is obviously a justifiable trigger to address a problematic HELOC account.

The HELOC agreements fall under Regulation Z, which implements TILA, and lists three primary bases for allowing a registrant to pull back:  (1) if the value of the collateral declines significantly below the appraised value; (2) if the creditor reasonably believes that the consumer will be unable to make payments as agreed because of a material change in the consumer's financial circumstances; or (3) if the consumer is in default on a material term of the HELOC agreement. 12 C.F.R. 226.5(b)(f)(3)(vi). 

Whether CitiGroup met these standards will be the focus of many lawsuits.  You cannot blanket an area and establish everyone who obtained a HELOC had income decline. For purposes of calling back earlier advances banks can better serve their efforts controlling advances by doing so with one broad swoop. It's the better alternative to make the argument values have declined for the target region versus overall borrower income.

What concerns us as analysts is where the assignment is never recorded under the MERS tracking system. According to M. Soliman, a Los Angeles based mortgage capital markets analyst, "its manipulation of the markets and earnings and that's a violation of the SEC rules governing servicing."

The government study into the Lehmann Bros. matter determined that lenders often used MERS to rotate loans in and out of active Pools. Soliman believes the HELOC issue is similar in nature to the Lehman Bros. study that first alleged a practice of culling loans was solely to prop up financial statements. Lenders who used MBS registrations for liquidity can prop earnings and lower delinquencies around each quarterly reporting period.

"They merely shift bad loans in and out of the various pools with current loans held for sale on banks lines." said Soliman.

Bank warehouse and gestation lines are used for holding assets pending delivery into a securities registration.

There is no indication as to whether these cases signal more suits against other lenders that made similar decisions on HELOC accounts

By Steve Henry Shafer