Can Lenders Legally Cut Back On Credit? As the mortgage crisis has grown in scope, lenders have cut back on home equity lines of credit. The move might not be legal, says our personal finance expert.
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Can Lenders Legally Cut Back On Credit?

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Can Lenders Legally Cut Back On Credit?

Can Lenders Legally Cut Back On Credit?

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ALEX CHADWICK, host:

Here's another effect of the mortgage crisis. More and more homeowners are complaining that their home-equity lines of credit are being reduced or even cancelled, and that has prompted federal regulators to remind the banks about the laws that cover these matters. There are laws here. And here to explain all, Day to Day's personal-finance contributor, Michelle Singletary. Hi, Michelle. Welcome back. What has prompted this action?

MICHELLE SINGLETARY: Thank you. Well, you know, as anyone who has a home or even just reading the news or listening to NPR knows, home values have continued to drop. And as a result, the lenders who have loans that are backed by these homes are snatching away home-equity lines of credit or reducing them, because the home values have dropped and these loans are backed by peoples' homes.

So, one federal regulator, the Office of Thrift Supervision, sent out a guidance to their institutions that they regulate to say, hey, guys, you can't just take peoples' home-equity lines of credit without some reason. There are laws against this, like the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act. You know, all of these apply to this type of loan. And if you're going to do that and it is legal, you've got to do it the right way.

CHADWICK: So, there are rights. Consumers have rights with these home-equity lines of credit. What are they?

SINGLETARY: Well, for one thing, say, for example, your home value has dropped. They can't contact you and say, this loan is due in full now. They have to follow the credit agreement that they have with you. If, in fact, they've snatched away your line of credit, there has to be a reason behind it. They've also got to give you notice. There are procedures that they have to follow. Now, if, in fact, your home values have dropped, yours in particular and those in your area, they can reduce it or take it away. If, for example, you have not been keeping the property up, then that could be a reason for them to remove the home-equity line of credit. If you got it under fraudulent circumstances, like, for example, you hiked your income, they can take it away.

CHADWICK: So, you know, interesting. We read that one bank, National City Bank, began offering its customers cash for closing out their home-equity line of credit, just get out of it altogether. What's the deal here?

SINGLETARY: Well, obviously, when banks have home-equity lines of credit on their books, that is a risk to their portfolio, that you may not pay. And we know, increasingly, consumers or homeowners have been defaulting, not just on their primary mortgage, but also on these lines of credit. And so, what some institutions are doing, in this case, National, is saying, you know what? We don't want as much of this risk on our books, so let us give you some money to allow us to take this line of credit away.

CHADWICK: How about people who, maybe, are really counting on this home-equity line of credit. They need the money for something. It's taken away. They think it's unfairly taken away. What do they do?

SINGLETARY: Well, the first thing you'd want to do is contact your lender. Get a reason from them why they took it away. If they say that it was because of home values, ask them, what did you use to determine that? You may have to have an appraiser come in to prove, in fact, your home value has not dropped. In some areas of the country, your home values have not dropped, so there wouldn't be a legitimate reason for them to take it away from you. So, contact your lender. If you get nowhere with the lender and you still think that they've done it unfairly or unlawfully, definitely contact the regulator that regulates that institution.

CHADWICK: Very good. Thank you, Michelle. Personal-finance advice from Michelle Singletary. She writes "The Color of Money" column for the Washington Post. Michelle, thank you again.

SINGLETARY: You're so welcome.

(Soundbite of music)

CHADWICK: This is Day to Day from NPR News. Stay with us.

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