What Happens to Your Home Equity Line of Credit if the Lending Bank Fails
Your home equity line of credit will not be discharged if the lending bank fails. However, you may be unable to access the funds for a short period of time while the loan is sold to another lender. This process typically takes 60 to 90 days, but in the end you will experience a relatively easy transition from one lender to the next.
Why Banks Fail
Banks fail for the same reason businesses and households declare bankruptcy: they have too much debt, and not enough assets. When the banks can no longer support their business due to debt payments, they will have to move through the process of closing. This process is overseen by the Federal Deposit Insurance Company. Similar to a personal bankruptcy, a bank failure is handled by selling off bank assets to investors so existing debts may be paid off. In most cases, those debts are not paid off in full. In fact, day-to-day account holders may be some of the losers if they have more than $250,000 on hold at the bank when it fails. The excess amount will not be repaid because it is not insured by the FDIC.
Who Buys Loans
Once the bank has closed, the FDIC steps in. They arrange buyers for all outstanding assets. It may be contrary to think of a loan as an asset, but your loan is an asset to the bank because the bank would continue to make money on the loan if it had not closed. The only loans that are not assets are those that are in default. Because your loan is an asset, another lender will step in to purchase that loan. This is usually another large bank, but some smaller investors may buy loans when a bank fails.
Why Your Loan is Suspended
While the process is handled, your loan will go through a grace period and likely be suspended for a short period of time. The grace period means you will not have to make loan payments; you should note the payments will be due as soon as the grace period ends. Your home equity loan will likely be inaccessible if it is distributed through a credit card, as most lines of credit are. The credit card will not actually be connected to an account anymore. The new lender will have to set up an account for you and issue you a new card before you can start using the line again.
What You Should Do
There is nothing to do during this period of time but wait and assure you are setting aside money to make the payments when the grace period ends. This is typically not a huge problem for a borrower, but it may be if you are in immediate need of the funds in order to make payments. For example, if you are in the middle of remodeling your home, you may not be able to simple halt the project. In this case, you can contact the authorities in charge of selling your loan. There are typically very few options to get the line of credit restored quickly.