Keeping Ahead of HELOC With Marty Gallagher, EVP and CCO Of Beneficial Bank


In recent months, discussions about Home Equity Lines of Credit (HELOC) have intensified as the outstanding balances by end of year draw "EOD" are expected to increase sharply over the next five years. 

ABA reviewed the joint guidance issued last summer, and also spoke with Martin Gallagher, EVP and CCO of Beneficial to obtain his views on this issue.  

According to the OCC, the amount of HELOC outstanding balances by EOD year nearly doubled last year, rising from $15 billion in 2013 to $29 billion.  Subsequently, that number is expected to increase over the near future, nearly doubling again to $53 billion in 2015, and eventually reaching $111 billion by 2018.  

While this drastic increase has some bankers concerned, recent regulatory guidance and presentations given by the banking trade associations and regulators have strongly suggested that banks take a proactive approach, with strong data, and the personnel to apply it enabling banks to get ahead of any material issues.
“The first thing that you need to do with this situation is Identify the universe of what is in store for the bank,” stated Mr. Gallagher.  “You need to identify your end of draw periods, make sure your data is clean and proper, and do a legal review of the documents.”

This emphasis on developing a clear picture of a bank’s end-of-draw period exposures is exactly what regulators are looking for, according to the joint interagency guidance issued last summer. The publication also stressed the importance on opening early dialogue with borrowers to “communicate clearly and effectively to prudently manage exposures in a disciplined manner.”

“I’ve heard of some banks reaching out six to 10 months in advance, but we think it’s wise to do that about a year in advance,” said Mr. Gallagher. “We want to make sure customers are aware as soon as possible that the EOD period is coming and offer them some different products or services that can help them if they don’t want to term out.”

The guidance also urges that special attention be paid to credit scores, utilization rates, payment history, draws and curtailment, particularly for customers that banks judge to be high-risk candidates, so that any troubles under the surface can be identified before payments double or even triple.

“We think that its wise to refresh credit scores on an annual basis, or in the event that we’re behind another mortgage from another bank, we might go semi-annually or quarterly,” said Mr. Gallagher. In our case, we had to review documentation carefully because of mergers we have completed so that we were sure we were familiar with what the merged banks had done previously.”

Finally, the guidance calls for clear documentation of the link between a bank’s ALLL methodology and their EOD performance, as higher-risk borrowers with HELOCs nearing the end-of-draw period pose greater repayment risk for ALLL purposes.

“We analyzed the losses in our HELOC products over the years and once we identified the high risk candidates we started to make some appropriate adjustments to make sure that they were covered in our reserve,” said Mr. Gallagher. “We also included that information into our qualitative factors based on previous losses.”

ABA encourages banks to review the guidance to ensure compliance and that their ALLL is adequately funded.