Home-equity loan products are increasingly popular for both consumers and financial institutions. But in many cases, these aren't your parent's home-equity loans, and they carry substantial risk. New versions may feature interest-only options, limited or no documentation, higher loan-to-value or debt-to-income ratios, and other characteristics that could increase credit risk.
Historically, delinquency and loss rates for home-equity products have been low; however, regulators are now concerned about the combination of rapid growth, new products with higher embedded risk and the easing of underwriting standards. In many cases, regulators have found that an institution's credit risk-management practices for home-equity lending aren't keeping pace with these changes. So, on May 16, the Federal Reserve joined in issuing inter-agency guidance (SR 05-11) to promote sound risk-management practices for home-equity lending programs.
This guidance describes sound credit-risk management systems for areas including product development and marketing; origination and underwriting; third-party originations; collateral valuation; account management; portfolio management; operations, servicing and collections; secondary market activities; portfolio classifications; the allowance for loan and lease losses, and capital.
The complete SR letter can be found on the Board of Governors web site at www.federalreserve.gov/boarddocs/srletters/2005/sr0511.htm. For more information about the guidance, contact Scott Smith at (314) 444-8836 or toll-free at 1-800-333-0810, ext. 44-8836.