Part Two of a Series on HELOC Lending
As we explored in the previous blog of the series, tappable equity among homeowners is currently at an all-time high. In fact, according to TransUnion, nearly 65 percent of current homeowners are eligible for a home equity line of credit (HELOC), presenting a lucrative business opportunity for lenders looking to expand their service offerings.
So how do lenders moving into the HELOC market ensure they’re building a sustainable and competitive program? Along with being aware of the potential risks to offering HELOCs and best practices for mitigating them, lenders will also benefit from robust technology that empowers efficiency, cuts out compliance mistakes and ultimately improves the borrower experience.
Mitigating HELOC Risk
The first step to building a low-risk HELOC program is to review the guidelines in place to ensure that loans are only issued to borrowers who can reasonably be expected to pay off any withdrawals on the line of credit. In addition to having a strong credit history, lenders should also establish baseline Debt-to-Income Ratios (often set between 40 percent and 50 percent) and a Loan-to-Value maximum ranging between 60 percent to 90 percent, depending on other borrower factors.
The good news is that HELOC borrowers have historically proven themselves more financially responsible than many other types of borrowers; according to the same study from TransUnion, nearly 85 percent of current HELOC borrowers have a credit score of 720 or above, and these borrowers have also demonstrated lower delinquency rates and a higher frequency of paying more than the minimum payment per installment.
Lenders should also be flexible in the HELOC programs they offer to reduce the risk of default. Since HELOCs are a relatively long-term and variable product, the program should accommodate the borrowers’ unique financial situations at the time of origination and also adjust to financial changes later in the loan term. For example, lenders can offer the borrower the option to refinance as a fixed-interest rate loan once the borrower reaches the repayment period so he or she will know exactly how much to budget for payments each month.
As with any loan product, lenders should also be aware of the regulatory landscape governing the HELOC marketplace to avoid compliance risk and keep compliance costs to a minimum.
Lenders will greatly benefit from taking advantage of technology in their HELOC programs. The best tool a lender can have in their arsenal is document generation and eSignature technology, which automates much of the HELOC application and underwriting process to ensure loan quality and compliance, increase efficiency and provide a more convenient borrower experience.
For example, Docutech’s ConformX enables lenders to integrate with their current loan origination system (LOS) to automatically pull borrower information and generate HELOC paperwork specific to each transaction using rules-based intelligence. The solution is fully equipped with state-specific HELOC security instruments and all required state and federal disclosures.
Document technology further bolsters compliance by running regular data integrity checks that alert lenders if data is incorrect or missing and by providing a complete audit trail through LOS pushback. Lenders may also have access to a compliance services team that monitors regulatory developments within the industry and can provide further guidance on areas of uncertainty.
Finally and perhaps most importantly, lenders must offer a quick and convenient HELOC experience to borrowers for their programs to rise above the competition. By incorporating document technology, borrowers can view and sign their HELOC documents anytime, anywhere and on any of their devices so they’ll have access to their equity in less than a week.
In the final blog of this series, we’ll discuss trends in HELOC usage and how lenders can support these trends to build the most attractive HELOC program.