Line of Credit

Line of Credit - 5/09/08

Intro: Do you have a line of credit secured by your home? Maybe you need to use it to pay a child's tuition, or to purchase a new car, or to pay medical bills. If you have a line of credit, watch out! Hundreds of thousands of homeowners recently have received a nasty letter from their bank, telling them their line of credit has been frozen and can no longer be used. If you've never missed a payment on your credit line, is this fair, and is it legal? Here to answer is attorney Michael Solomon.

Jeff: Mike, can a bank just shut off your line of credit, even if you haven't missed a payment?

Mike: Unfortunately in all of those pages of fine print that you sign when you borrow money with a line of credit there's a clause that says that the bank can freeze your account if housing values drop. And as we all know, housing prices are going down. Because defaults on lines of credit are up over 47% in 2007 and things look like they are getting worse, the banks are starting to take steps to protect themselves by closing off credit. And they're not looking at each borrower individually, but instead they're using a blanket approach. One letter I saw stated that due to the drop in values in the area the bank was freezing the borrower's loan. The bank had not looked at the individual's home value or the amount of equity he had in his house. Also, the freeze was effective immediately.

After your credit is frozen, the bank gives you the chance to reapply for a credit line. But that will take time. If you were about to spend money on tuition or to fix up your house, you're stuck until you can redo your line of credit. You'll have to pay fees all over again, and the application will be a lot harder than it was a few years ago, because credit laws tightened up. Also, some people might wind up with bounced checks. Let's say you mailed a check off your line of credit to the IRS on April 15th but received the bank letter the next day freezing the account. That check will bounce. The IRS doesn't look kindly on bounced checks.

Jeff: Do you have any legal rights?

Mike: No one knows for sure. But people are being harmed by these actions.

  1. First, you may have to scramble to refinance in a bad market, with higher costs, to pay for larger expenditures like college tuition.
  2. Secondly, you may have checks bounce because the credit lines are being frozen without advance notice.
  3. Thirdly, your credit score could be impacted.
  4. 4. Finally, you will have to incur new costs to get a new line of credit, and you may have already spent money on fees for your first line of credit.

Certainly there are a lot of problems with the banks actions. They have made blanket decisions with no notice, financially harming many people who have done nothing wrong. I suspect there will be litigation on this. But unfortunately, it will not give anyone immediate help.

Jeff: Are there any other steps people should take if they have a line of credit?

Mike: Contact your bank now and see if they are considering freezing credit lines. Another option is to tap into your line now and put the money into savings. This will still cost you money because the interest you owe on the loan will be higher than the interest you will make depositing the money. If you have already had your line of credit frozen, contact the bank and see if you can convince them to thaw the freeze, because you have sufficient equity in your home to protect the bank against a default.