If your bank or savings and loan goes down the tubes, what happens to the loans you've taken out?
Normally, nothing. You keep on making regular payments. Sometimes the loan is taken over by a new institution, sometimes it's inherited by the government. But your lending agreement rules. Usually, no one can force you to speed up payments or refinance.
But there's one big exception that everyone ought to be aware of. You might indeed be forced to repay early if you've taken a home-equity loan. The Resolu- tion Trust Corp., which is handling failed S&Ls, still has 309 institutions on its hands -- and a call could come from any of them.
So far, I've heard of only one: Savers Savings Association of Little Rock, Ark. (formerly Savers Federal S&L). About 135 home-equity borrowers recently got letters ordering them to repay by July 23.
Those customers are now scrambling for refinancing. When they open new home- equity credit lines at other banks, they'll have to pay start-up costs all over again.
Their predicament stems from a little-understood clause that's in most home-equity loan agreements exercised prior to Nov. 7, 1989. It's a "call clause." It allows the lender to demand full payment anytime it wants.
You agreed to the call clause when you signed the loan papers. But you probably didn't notice it -- or if you did, its importance may have escaped you. Old agreements also let the lender freeze your credit line at will, which would stop you from borrowing anything more.
Starting Nov. 7, 1989, new rules apply, thanks to congressional passage of the Home Equity Consumer Protec- tion Act. Calls are no longer allowed unless you've handled yourself fraudulently, missed payments or put the collateral (your house) at risk -- for example, by dropping your homeowner's insurance.
But these rules apply only to new loan agreements, not to old ones. If you have an older agreement, check the fine print. You'll probably find an enforceable call clause there.
Home-equity loans under new agreements can be called if your institution has been taken over by the Resolution Trust Corp. "Suspending new draws against credit lines may be considered to be in the failed institution's best interest," says Ken Williams of Moebs Services, which tracks home-equity lending.
At Savers Savings, all the home-equity borrowers are managing to refinance their loans, reports William Bruton, executive vice president of the retail banking area. He calls the original lending agreement "a flawed loan, with insufficient protection for both borrower and lender." In theory, other lenders might have bought those loans. But in practice, their terms were so generous to consumers that no one wanted them.
Savers's 10-year credit lines required that 10 percent of the principal be repaid every year. But nothing stopped customers from reborrowing that 10 percent, and most did. "One customer told me he didn't know where he'd get another loan like this, and the answer is he won't," Bruton says.
Bruton says that Savers was willing to work with any borrower who couldn't refinance his or her loan and wouldn't foreclose. But it has the right to. That's another reason to keep your home-equity borrowings low.