HELOC Funds Accessed With a Credit Card: No Right To Offset Absent Express Agreement

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The idea of borrowing against equity in a residential home through a second mortgage has been around for almost a century. However, the popularity of a home equity line of credit (HELOC) increased in the 1980s following the Tax Reform Act of 1986, which did away with the tax deduction for interest on non-mortgage debt. Combined with comparatively low interest rates at the time, HELOCs became attractive because a consumer could still deduct the interest on the HELOC after the interest on an unsecured loan was no longer deductible.

The method of drawing cash from a HELOC varies. For example, a consumer can get cash advances, get special checks, or use a credit card. Although the devices are different, the idea is the same: a draw against a line of credit secured by equity in a consumer’s residence.

And here is where two banking concepts (overly simplified) come into tension: (i) typically, a consumer’s credit card is unsecured and, absent a specific agreement to the contrary, any debts owed on the credit card cannot be set off against other balances at the bank; and (ii) debts owed on secured loans typically have provisions allowing a bank to set off an overdue amount by drawing from another account at the bank (offsetting).

In a recent federal appellate decision, Lyons v. PNC Bank, N.A., No. 22-1943, 2024 U.S. App. LEXIS 20490, 2024 WL 3800648 (4th Cir. Aug. 14, 2024), the Fourth Circuit confronted the tension between these two general rules in a case where a consumer made HELOC draws using a credit card and the bank offset overdue amounts owed on the HELOC from the consumer’s deposit account at the bank. The Court reviewed numerous federal banking laws to determine whether, in the absence of an agreement allowing offset, a bank may offset as the bank did in this case.

The decision focuses on the device (i.e., the credit card) used to draw the money from the HELOC. Given federal laws regarding credit cards, the majority concluded that if a bank issued a credit card to access a HELOC, then that bank could not offset amounts owed on the HELOC with available funds in a depository account with the bank. One of three judges dissented, noting the incongruity of the majority’s holding: “It makes little sense that the applicability of the offset provision would hinge entirely on the method of access, namely, whether the borrower was issued a plastic card.” Instead, the dissenting judge thought that the majority ignored “the many instances in law, regulation, and colloquial usage that treat HELOCs and credit cards differently.”

The Fourth Circuit encompasses Maryland, Virginia, West Virginia, North Carolina, and South Carolina, and this decision raises two practical issues for banks providing credit in those states through HELOCs.

• First, a bank should check its HELOC documentation and verify that the agreements with its customers include an express offset provision. (A bank should also check the documentation associated with any HELOC accounts that have been acquired through merger or consolidation.)
• Second, be aware of the practical implications regarding differing access devices for drawing on HELOCs. Issuing a plastic card for access to HELOC funds presents new challenges that did not exist prior to this recent decision by the Fourth Circuit.

The business litigation and financial services attorneys at Steptoe & Johnson PLLC have experience in guiding financial institutions through these issues. For assistance or questions about this alert, please contact the authors or a member of the Business Litigation or the Consumer & Retail Financial Services Team.