The Consumer Financial Protection Bureau is taking the position that banks cannot secure repayment on certain home equity lines of credit by pulling funds from their delinquent customers' checking accounts.
The bureau's argument in a court case filed by a customer of PNC Financial Services Group has implications for how banks structure HELOCs, which are coming back into favor as interest rates rise.
At issue is how HELOCs should be treated legally, given that they are open-ended credit lines, similar to a credit card, but are exempt from some card-related rules.
A PNC customer is arguing that the Pittsburgh-based bank should not have pulled some $3,000 over a few months from his checking account — saying that a HELOC is an open-ended credit plan and therefore is essentially a credit card. Because credit cards are often not secured by collateral, they are subject to different rules than collateralized loans. They also require lenders to undertake a separate debt collection process when needed.
In a federal appeals court filing Wednesday, CFPB lawyers wrote that a lower court's ruling "ignored regulatory text, history and context" when it ruled against the PNC customer, William Lyons.
"The CFPB is committed to ensuring that consumers are protected to the full extent of the law, especially in this challenging environment of rising interest rates," the agency wrote in explaining its decision to intervene in the case.
PNC has argued that Lyons agreed to provide collateral for the HELOC, and that the loan contract granted the bank the authority to pull money from his checking account as a way of obtaining payments that he owed.
U.S. District Court Judge Stephanie Gallagher sided with PNC in August, dismissing Lyons' complaint against the $559 billion-asset bank.
"Home equity plans, which are secured by real property, are simply different from credit card plans, which are not," Gallagher wrote in her opinion.
In an emailed statement, a PNC spokesperson said the judge had "correctly dismissed all of the plaintiff's claims" and that the bank "looks forward to defending" the earlier decision as it goes through the appeals process.
Lyons' lawyers appealed Gallagher's ruling last month, and the CFPB subsequently weighed in through a so-called friend-of-the-court brief.
If Lyons succeeds, lenders will likely have to review their current HELOC programs with linked credit cards, said Robert Maddox, a bank lawyer at Bradley Arant Boult Cummings. In that scenario, banks would be unable to offset missed payments by withdrawing the funds from their customers' checking accounts, Maddox said.
"They'll have to treat these like credit cards, and they'll have to go down that collection path," Maddox said.
Lyons had been a PNC customer for years, having opened a HELOC account with National City Bank in 2005, three years before it was bought by PNC. Lyons later opened a deposit account with PNC.
In 2019, PNC pulled nearly $1,400 from Lyons' checking account since he was late on his HELOC account. Lyons complained to PNC that it did not have authorization to do so. PNC disputed that claim in communications with Lyons in early 2020, and the bank withdrew $1,589 from his checking account in February 2020.
The CFPB's argument comes as HELOCs are once again
The CFPB has also sought to place some limits on lenders' ability to pull loan payments from consumers' deposit accounts through its payday lending rule. The rule, which
