Home equity loans are becoming popular once again. Some factors that are causing the rebound in the home equity loan market include interest rates remaining relatively low, home values beginning to appreciate in many parts of the country, college tuition costs continue to rise and credit card debt remains high for many homeowners. This is a “perfect storm” scenario for the resurgence in the origination of home equity loans as a source of needed funds for homeowners. In this regard, home equity lending reportedly increased more than 25% in 2013 which is the first increase since 2006.
In light of this surge in the origination of home equity loans, I wonder just how many of these lenders have given thought to establishing a sound Quality Control program to assess the overall risk of such loans – especially since home equity loans are not a standardized product? It seems that every home equity lender has different terms, rates and underwriting criteria for their product.
Obviously, the review of the appraisal is an important component (since the property’s value establishes how much equity exists in a property) but how many lenders conduct field reviews of their home equity loan appraisals? How many back-up credit reports are ordered to determine if any new trade lines have been opened by the borrower(s) or derogatory credit omitted from the initial credit report? Have the borrower’s income, employment and assets been re-verified? Are occupancy re-verifications processed? Are QC reports generated each month and shared with senior management? Are rejected home equity loan transactions reviewed by an officer or senior staff person on a second tier basis?
Lenders that decide that the time is right to originate home equity loans should also be proactive in establishing an effective quality control program in order to mitigate the special risks associated with this type of loan program.