Banks can cut home equity lines

Carolyn and Joe Mottola signed a contract for a new house on Aug. 14. They deposited a $5,000 check written on their home equity line of credit at Wachovia Bank. That same evening, they opened a letter from Wachovia dated Aug. 11 saying that their $100,000 line of credit had been suspended.

The reason, according to the bank's letter, was that the value of their Orange County, N.C., home had declined. It was worth $189,000.

That seemed odd to the Mottolas because they had just contracted to sell their home for $419,200. Mottola said he and his wife have excellent credit, they had borrowed very little from the line and never missed a payment.

The couple offered their selling contract as proof that the home's value was much higher. They were told that they would have to submit an appraisal at their own expense. Over the next few days, as the couple haggled with the bank, the $5,000 check was returned because of insufficient funds. The bank issued a new check, but not before the ordeal caused the couple restless nights. "You are powerless to deal with these people," Joe Mottola said.

Over the past year, hundreds of thousands of people across the country have gotten similar letters from their financial institutions as home values decline and banks try to minimize their risk. Wachovia sent such letters to 3 percent of their prime customers, said spokeswoman Christine Shaw.

These actions by the bank significantly reduce consumers' access to cash and in many cases affect their credit scores.

Your credit rating drops the closer you get to your credit limit. So if the bank cuts your $100,000 credit line in half and you have a $30,000 balance, your credit score will be negatively affected.

The trend has prompted the FDIC and Office of Thrift Supervision to issue guidance to remind lenders that if they decide to reduce or suspend a home equity line of credit, certain legal requirements designed to protect consumers must be followed.

I reviewed some of those rules online at www.fdic.gov. They didn't seem to offer a lot of consumer protection. Besides a requirement that banks notify you in writing, I saw no specific formulas on how a bank is supposed to determine the value of your home.

Reach Vicki Lee Parker at vparker@newsobserver.com.