There have been a number of lawsuits throughout the country this past year arguing that lenders have unlawfully suspended or reduced home equity lines of credit (“HELOCs”). Although the theory underlying these cases find its genesis in the recent declines in the real estate market, one court has already permitted a claim to proceed.
Under the Truth in Lending Act (“TILA”) and Regulation Z, a creditor may suspend or reduce a HELOC if “the value of the consumer’s principal dwelling which secures any outstanding balance is significantly less than the original appraisal value of the dwelling.” 15 USC 1647(c)(2)(B). The Commentary to Regulation Z provides that what constitutes a “significant decline” will “vary according to individual circumstances.” Commentary, cmt. 5b(f)(3)(vi)(6). The Commentary then states that there has been a significant decline ”if the value of the dwelling declines such that the initial difference between the credit limit and the available equity (based on the property’s appraised value for purposes of the plan) is reduced by fifty percent . . . .” The Commentary provides an example of a fifty percent decline:
For example, assume that a house with a first mortgage of $50,000 is appraised at $100,000 and the credit limit is $30,000. The difference between the credit limit and the available equity is $20,000, half of which is $10,000. The creditor could prohibit further advances or reduce the credit limit if the value of the property declines from $100,000 to $90,000.
Creditors, however, are not required to obtain an appraisal before suspending credit. Therefore, many creditors are using automated valuation models (“AVMs”) to assess whether a significant decline has occurred.