What Happens to Your Home Equity Loan if the Lending Bank Fails

A home equity loan is one of the most complicated loans to handle when a lending bank fails. The main reason for this problem is that a number of home equity loans are distributed through credit cards. While the situation is resolved, the credit cards may not be active. This can pose a problem for a borrower in the middle of a project who is relying on the funds to move forward.

Loans Are Bank Assets

Even though you have not paid back your loan yet, it is still considered an asset on the bank's balance sheets while it is in good standing. A debt will only move onto the negative side of the balance sheet if you default. When a bank fails, it essentially declares bankruptcy. Bankruptcy means the assets will be liquidated in order to pay off debts the bank itself owes.

Assets are Purchased after Bank Failure

When a bank fails, it's assets are bought by other banks or investors. This process is handled by the FDIC if the bank is FDIC insured, which nearly all banks are. Because the FDIC handles the acquisition, your debt will not simply disappear. Instead, a new lender will evaluate your loan to determine if they would like to own the loan in the future. Often, another bank will simply purchase all loans a troubled bank previously had to its name. Some purchasers will be more cautious, buying up only the debts with a good chance of repayment in the future. In this case, the high risk debts are more likely to be purchased by an independent investor looking to take on the risk. 

New Lender Takes Over Loan

Once a new lender takes over your loan, you will receive notification by mail. The lender will explain how you will begin to repay your loan to them. Since the lender purchased the existing loan contract, the lender is bound to that contract the same as your previous bank was. The lender cannot simply change the terms. However, the lender may offer you a chance to modify the loan when they take the loan over. You should be wary of this opportunity; when a lender offers to modify, the lender typically wants to benefit from the changes. If you do not modify in any way, you will simply make your payments to a new account than you used to. All other items will remain the same. 

Credit Cards Frozen in the Meantime

You will likely find there is a grace period on your loan payments while the asset is sold to another lender. You will still owe the payments that come due in this time period, but you will owe them at a later date. Similarly, your home equity loan may be suspended for an unknown period of time. This is particularly true if you get your funds from a credit card. Unfortunately, there is little you can do to get the funds moving again until the loan is bought by another lending source. You will simply have to wait.