Four federal financial institutions regulatory agencies and the Conference of State Bank Supervisors on July 1 issued Guidance to financial institutions regarding home equity lines of credit nearing their “end-of-draw” periods, when the loan resets to an amortizing payment under which the principal amount of the HELOC will begin to be repaid.
This new guidance explains that examiners will be reviewing financial institutions’ end-of-draw risk management programs for provisions that address five risk management principles:
- Prudent underwriting for renewals, extensions, and rewrites
- Compliance with pertinent existing guidance, including but not limited to the Credit Risk Management Guidance for Home Equity Lending and the Interagency Guidelines for Real Estate Lending Policies.
- Use of well-structured and sustainable modification term
- Appropriate accounting, reporting, and disclosure of troubled debt restructurings
- Appropriate segmentation and analysis of end-of-draw exposure in ALLL estimation processes.
The guidance suggests that prudent risk management expectations generally include:
- Developing a clear picture of scheduled end-of-draw period exposures.
- Ensuring a full understanding of end-of-draw contract provisions.
- Evaluating near-term risks.
- Contacting borrowers through outreach programs.
- Ensuring that refinancing, renewal, workout, and modification programs are consistent with regulatory guidance and expectations, including consumer protection laws and regulations.
- Establishing clear internal guidelines, criteria, and processes for end-of-draw actions and alternatives. Management should establish and define clear loss mitigation steps so that well-trained account representatives can quickly and efficiently process requests.
- Providing practical information to higher-risk borrowers.
- Establishing end-of-draw reporting that tracks actions taken and subsequent performance.
- Documenting the link between ALLL methodologies and end-of-draw performance.
- Ensuring that control systems provide adequate scope and coverage of the full end-of-draw period exposure. .
The complete guidance can be found at the following link:http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20140701a1.pdf