Compliance Blog

This past Memorial Day weekend marks the start of summer (I love summer) and my one-year mark here at NAFCU!

Many members take out a HELOC for rainy days, vacations, or emergency expenses which means a credit union may have some HELOCs on the books that have a $0 balance and may stay unused for many years. Ideally, the credit union would prefer to have the member use the HELOC to generate income, but if a member chooses to not use their HELOC can a credit union freeze or close the account?

Prohibiting Draws

Section 1026.40(f)(3)(vi) states that a credit union may prohibit additional extension of credit when:

“(A) The value of the dwelling that secures the plan declines significantly below the dwelling's appraised value for purposes of the plan;

(B) The creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer's financial circumstances;

(C) The consumer is in default of any material obligation under the agreement;

(D) The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement;

(E) The priority of the creditor's security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; or

(F) The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice.”

The official interpretation explains that the credit union may only prohibit additional extensions of credit when one of these designated circumstances exists, stating “when the circumstance justifying the creditor's action ceases to exist, credit privileges must be reinstated, assuming that no other circumstance permitting such action exists at that time.” The regulation would not allow the credit union to prohibit future draws solely because the member has not used the HELOC.

Closing a HELOC

Section 1026.40(f)(2) prohibits a credit union from terminating a plan and demanding repayment unless:

“(i) There is fraud or material misrepresentation by the consumer in connection with the plan;

(ii) The consumer fails to meet the repayment terms of the agreement for any outstanding balance;

(iii) Any action or inaction by the consumer adversely affects the creditor's security for the plan, or any right of the creditor in such security; or

(iv) Federal law dealing with credit extended by a depository institution to its executive officers specifically requires that as a condition of the plan the credit shall become due and payable on demand, provided that the creditor includes such a provision in the initial agreement.”

The official interpretation clarifies that a credit union is “prohibited from terminating and accelerating payment of the outstanding balance before the scheduled expiration of a plan. However, creditors may take these actions in the four circumstances specified in § 1026.40(f)(2). Creditors are not permitted to specify in their contracts any other events that allow termination and acceleration beyond those permitted by the regulation.” Emphasis added. The regulation would prohibit the credit union from terminating a HELOC plan due to inactivity.