The Federal Reserve Board has issued a key ruling affecting thousands of current and future home-equity loan borrowers.

After six months of debate, the board last week voted unanimously to tighten certain disclosure requirements for home-equity lenders.

The Fed said lenders must now state in the equity-line contract document that they retain the option to cut off credit advances whenever the rate cap is reached. Existing federal regulations do not mandate such a disclosure.

Though the new rules represent an effort by the Fed to provide stronger protections to home-equity borrowers, they also signified a new setback for Consumers Union.

In a suit filed last November, Consumers Union challenged the Federal Reserve Board's legal authority to permit any freezes of credit-line drawdowns because of rate caps. The Fed strongly disagreed.

The suit was dismissed by the U.S. District Court in the District last May, but is under appeal.

At the core of the equity-line freeze issue are two competing needs: the homeowner's desire for credit under predictable and acceptable terms, and the lender's desire to lend money at a profit.

Most home-equity lines of credit are adjustable-rate secondmortgages secured by principal residences.

The contractual terms typically provide for a basic rate index, such as the bank prime lending rate. On top of that is a rate margin -- a fixed charge that gets added to the index every month or periodic adjustment date.

The rate on the credit line commonly has annual and lifetime caps, or maximum levels. During the course of a year, for instance, the rate might be limited to no more than an increase of one percentage point or two percentage points.

The same loan might include, for example, a lifetime maximum of 13 percent, 15 percent or 18 percent -- the top rate you'll ever be charged. Borrowers can draw down funds on their equity line until they reach a predetermined limit, or enter the principal payback period for the loan.

When the Fed first issued regulations implementing the Home Equity Loan Consumer Protection Act in June 1989, it expressly permitted lenders to halt drawdowns on lines of credit when rate caps were reached.

To grasp the Fed's rule, say you have a $50,000 home-equity line with a 15 percent lifetime rate cap. You've already drawn down $10,000. Then, because of an international economic crisis, the prime rate zooms to 16 percent. You have a need for another $20,000 and you'd like to tap your equity line at its maximum rate of 15 percent.

The bank, however, says no dice. With a prevailing market, or index, rate higher than your maximum cap rate, your lender says, we can't -- or won't -- give you a cent until rates come down.

Consumers Union argues that lenders shouldn't be allowed to turn off the spigot like that, even if the right to do so is clearly disclosed to borrowers in advance.

The Fed argues the reverse: To force lenders to lend money on uneconomic terms is a Pandora's box, for consumer and lender alike.

In a discussion of its new rule, the Fed said that prohibiting credit-line freezes when rates exceed the cap would ultimately cost borrowers more. Banks simply would raise the lifetime caps in all new home-equity lines-of-credit to much steeper levels -- 18 to 24 percent, for example, rather than 15 percent or lower.

Or they would shorten the term of the drawdown period, increase the margin, tighten credit standards or get out of the home-equity line business altogether, thereby reducing the benefits of competition.

If borrowers want to ensure their ability to continue drawdowns beyond the lifetime rate-cap limit, said a Fed staff analysis accompanying the new regulations, they can readily "negotiate a higher rate cap from the lender before entering into {the line-of-credit agreement}."

The key to the issue, the staff memo said, is that rate caps and drawdown freezes be genuinely "bilateral," agreed to and understood in advance by borrower and lender.

To achieve this from the consumer's perspective, the board said, the loan contract itself -- and not just the statutory truth-in-lending handouts -- must spell out how and when drawdowns may be frozen.

The contract must also make clear that when interest rates drop back to levels permitted under the loan, the consumer's credit line springs back to life, and the money is free to flow again.