A few years ago during the credit crunch, one of the credit cards I paid off each month sent me a letter saying they were reducing my credit limit. We hardly put anything on that charge card, but I called and asked why they were doing this. I was told it was because we weren’t using our credit and they wanted to allocate it to others that would.
I’m wondering if this could happen to a HELOC? Say you paid off your HELOC and kept it at a zero balance, could the mortgage company cancel the account or reduce the credit limit? If there is a chance of this happening, it is better to keep a small balance in there to avoid the account being canceled or reducing the credit limit?
I know some of you might think, if it is at zero balance then you don’t need it to why would you care. But if you keep the HELOC as an emergency source of funding, you don’t want the thing taken away at the worst possible time.
I suspect this sort of “on demand” loan has fine print that it can be altered or cancelled with a minimum of notice - “call the loan”. Of course a bank is going to have the necessary weasel words to cancel a line of credit (card, HELOC) if they don’t think it’s safe enough or worthwhile (profitable) to keep it open.
It kind of makes sense - the bank probably has to report their maximum exposure- what if everyone maxed out their HELOC or LOC at once? They would also have to allow for that, and I assume under banking rules, they have a ceiling for such exposure. If you aren’t using your credit, better to put it to productive use with someone else.
There are as many answers as there are banks & loans. Read your fine print and call your lender.
Speaking in generalities …
The odds are overwhelmingly in favor of them being able to cut your available line at their whim. Whether you have an outstanding balance or not is mostly immaterial. By “mostly” I mean that if you have a $50K line and a $2K balance, they can probably reduce your line to $2K at any time for any reason or no reason. But not below that; at least not on a whim.
Most open-end loans include a call provision where they can demand 100% payment at any time they become legitimately concerned about the loan’s safety. Which they may do if they detect something like you’re overextended then lose your job. Essentially they want to race your other creditors to the fire exits, and get paid in full before you go BK. And of course, each lender that does that increases the odds the borrower will be forced into BK by their sudden liquidity crisis caused by the banks racing each other for the exits.
Since 2008 the industry as a whole has really cut back on the amount of standby credit (from their POV) or rainy day emergency loan availability (from your POV). Naturally since about 2011 they’ve forgotten how they got burned in 2008 and are slowly ramping up standby credit again for the attendant fee income & such.
But I’d expect them to be much quicker then last time to do a mass retraction at the next sign of a credit overhang in this country.
I would say that any loan is in danger of being closed or modified at any time. If your contract has some fine print that protect you in any way, I’d be surprised.
This was my discovery during 2008, and several other businesses experienced similar problems. You got a line of credit, credit cards, whatever, during the good times thinking that you’d have a reserve if things did go tilt. When things went tilt, all your credit got canceled just when you needed it.
One of my clients was using their HELOC to open a new business location in 2009 - their check to the landlord for first, last, security and build-out bounced. The letter explaining the closure of the HELOC was in the mail and arrived the next day.
But even keeping a small balance in there isn’t enough. During the same period, I had used 20k out of 60k in my HELOC and the bank dropped my limit down to the 20k, also without any advance notice.
Thanks for the replies so far. Very helpful. I have the HELOC agreement in front of me.
REFUSING TO MAKE LOANS. REDUCING YOUR CREDIT LIMIT. Lender may refuse to make a loan, or may reduce your Credit Limit, if:
(Here are my select items which aren’t obvious such as being in Default or Property Value is greatly reduced by government action.)
[ol]
[li]The value of the Property declines significantly below its original appraised value.[/li][li]Lender reasonably believes you will not be able to make all your payments on time because your financial circumstances of changed materially.[/li][li]A federal regulator notifies lender that it would be unsafe or unsound to make a loan under your account.[/li][li]The Annual Percentage Rate exceeds the maximum legal rate.[/li][li]The Lender has reviewed the loan agreement and required loan disclosures and determined that the documents are incomplete or are not executed as required to create a valid, enforceable lien.[/li][li]Lender is limited by government action from imposing a Finance Charge at the Annual Percentage Rate.[/li]Another section:
CHANGE IN TERMS. Lender can change the terms of this agreement with 15 days notice if:
[li]The change will benefit you during the whole future time this agreement is in effect; or[/li][li]The change is an insignificant change in terms.[/li]Lender may determine whether a change meets one of those requirements.
[/ol]
#1 I believe would only occur after some serious damage has taken place in the real estate market. This risk I would consider with this property to be extremely low for it to be “under water”, due to the fact this property was purchase long before any real estate bubble. #2 This I find alarming to read. Because on their website they want you to contact them if you have problems making your payments, but this to me signals a serious problem to them which would cause them to invoke #2 here. Meaning they wouldn’t know I lost my job unless I called and told them. Where if I lost my job, and immediately wrote a HELOC check to place in my regular checking account this wouldn’t get their attention, but if I called up and said “I was downsized…”, it just seems better not to tell them this. I’d think I would list the home for sale before I’d tell them I lost my job. #3 I have no idea what this means at all and can’t picture a scenario in which a federal regulator would be involved. But I should admit I’m not sure what would be considered a federal regulator, could this mean, I could owe a ton of money to the IRS, so they drop a dime on me and tell them I’m a bum and to mess with my HELOC? #4 This has pretty low risk, unless the prime rate (which is what this loan interest rate is based on) goes totally wild. #5 This sounds like something that would address the initial processing of the loan, not after it has existed for years. Or am I mistaken? #6 I guess this is related to #4. #7 I did have an interest rate lowered on a HELOC years ago without my interaction of it at all. They sent me a letter one day saying they were lowering my interest rate. I called and was told they were doing this to stay competitive. #8 Not that I am going to be overly concerned about a few cents either way, but what might be insignificant to them, could it become significant to me?
The above are my selected highlights from a six page document on this HELOC. I have discussed those which concern me most.
It doesn’t say they could reduce the credit limit or cancel the account for non-use. But I suppose they could perhaps use something from the above to claim it is a concern for them and are taking an action which results in that.
Anything else I am overlooking here that could screw up a HELOC which is being depended on as an emergency rainy day fund? By the way, I don’t consider taking long vacation trip or a new car an emergency.
So while they might not be doing that during good times, they might start running credit checks on those with a HELOC to see if any of their customers are overextended and want to limit their risk.
I imagine what could happen is that a regulator would go the bank and say, “you are lending out too much money as high-risk HELOC loans – reduce your exposure”, and the bank would do so by reducing your credit limit/cancelling your HELOC. The regulator wouldn’t be looking at your loan specifically – they have in interest in making sure the bank is sound, not you.
I’m sure I could find the provision in the fine print. In terms of explanation, there really wasn’t much of one. They certainly didn’t cite a specific section of the agreement, just said “We reviewed accounts and reduced your limit.”
One of the provisions from your previous post regards the value of the house. I bought my house at 260k, it was briefly estimated at 340k at the peak of the market in 2007 and at the bottom of the market (in 2008) was estimated as low as 220k. Of course, no formal appraisal was done at the time they canceled it.
Anyway, the experiences that I and many of my business clients had around 2008 tells me that you shouldn’t count on debt, especially at the time when you’ll need it most. My strategy for cash management is now entirely different.
Number One doesn’t require your loan to be underwater (ie, your debt being greater than the current value of the house), just that the value of the house dropping below its original valuation when the HELOC was set up (assuming that’s what ‘original appraised value’ means in this contract).
Just to confirm what dracoi said in post 10. They will do it unilaterally if it suits them. In my case, they sent a letter basically said that I could not draw on the line of credit anymore. (I had no problems or anything like that; rather, it was E*TRADE Bank and they were the ones in dire financial straits in 2008, so they were cutting back their exposure across the board.)
Note that in my case it was different than reducing the line of credit; my credit limit still showed on the statements and it was unchanged…but as I paid down the loan, I could not draw money back out. This was years before the contractual end of the seven-year draw period. The plus side was that they also stopped collecting the annual fee for the line of credit (because it was effectively no longer a line of credit, I guess.) So that saved me $150 or so a year.
I have a HELOC which I hadn’t used in a couple of years. One day there was a $50 annual fee on it. The HELOC is in jeopardy of being cancelled - by me! I have a reminder to cancel it about a month before the next charge if I no longer need it.
That’s another way the banking system is reducing their exposure to standby credit. They’ve woken up to the fact that you (any you) having an idle credit line is then providing oyu a service. One that has adverse strings for them when times get bad.
So now they’re charging for the service. Which will cause a lot of people to think whether they need it bad enough to keep paying “just in case”.
An interesting consumer protection issue comes up when these two policies collide. i.e. You faithfully paid your $50/year to keep the account open until you needed it. At which point they cancel or massively curtail it. So you’re never able to use the thing you bought and paid for.
I predict some legislation to deal with this issue will be one outcome of the next big credit crunch.
Sounds like the best thing to do (as we all have always suspected) is to have a real emergency fund of actual cash as a primary account, and use a HELOC as a backup source of funding when needed to be a secondary source. Because when you need it most in an emergency you can’t rely on a HELOC to be of assistance.
The attractive concept of using a HELOC as an emergency fund is that if you lose your job for an extended period of time, you can use the credit there to get by until you are employed again. Hopefully, you can give it a top priority to pay-off what was borrowed during your down times. Because it would be near impossible to open a HELOC while you are unemployed if the job was your main chance of being able to keep up with payments for the HELOC.
So in an example, say you have $50K in cash in your emergency fund, and a loan amount of $50K on the HELOC. If you use that money to pay-off the HELOC, you reduced a debt and don’t have the cost of the interest which could be around 4.5% currently. But if you pay-off the HELOC, thus depleting most or all of your emergency cash and they find a reason to cancel or limit your HELOC when you need it in an emergency than you are in trouble. But if you keep the $50K in cash you still have that interest payment of $2250.00 a year to make, although it is tax deductible.
In the above scenario, it might be OK to keep the HELOC balance and cash in your account to be safe. Another option would be to make aggressive but manageable payments towards the HELOC’s principal every month. So that you are still saving money, but also paying off the debt.
I think if I got a letter like that, I would go look into the fine print, but I wouldn’t expect to find an out to prevent them from doing that, because I’m a consumer and they are the professionals who have put together this whole thing by many people over time to protect their interests.
