HELOCKed: Putative Class Survives Dismissal Under "Responsible Lending" Standard

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It was a not unexpected result at the motion to dismiss stage: On June 30, 2011, the Northern District of Illinois permitted borrowers in a multi-district litigation putative class action to go forward with claims that JPMorgan Chase Bank NA impermissibly reduced or suspended their home equity lines of credit. (In re JPMorgan Chase Bank Home Equity Line of Credit Litigation, No. 10 C 3647, 2011 WL 2600573 (N.D. Ill. 06/30/11).)

Chase had moved for dismissal for failure to state a claim under Rule 12(b)(6), arguing that federal law and governing contractual provisions permit it to reduce or suspend the HELOCs at issue. The district court disagreed, and its holding has created uncertainty about whether HELOC lenders can continue to rely on a safe harbor in the Federal Reserve Board’s Official Commentary to Regulation Z, the Truth in Lending Act’s implementing regulation.

That safe harbor has allowed them to reduce or suspend a HELOC line when a decline in value wipes out half of their original equity cushion, regardless of the borrower’s current equity in the property. The court’s explicit application of a “responsible lending” standard to HELOCs may have a negative effect on settlement negotiations in similar cases and create uncertainty in the management of HELOC portfolios going forward.

This article, co-authored by Jonathan Jerison and Valerie Hletko, was originally published in Consumer Financial Services Law Report (Volume 15, Issue 5).

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