If you are not checking your home equity line of credit (HELOC) often, now is the time. The number of thieves getting access to these accounts and siphoning out thousands of dollars by stealing identities and fooling lenders has increased. However, the risk can be reduced and victims' credit rebuilt by following a few simple steps.
A home equity line of credit is a type of revolving credit in which a homeowner borrows against the amount of home equity – that is, his or her ownership stake – in a residence. The home is used as collateral for the borrowed money. If a payment is late or can't be met, the borrower could eventually lose the home.
Homeowners are approved for a specific amount, generally $20,000, $30,000 or $50,000. The amount becomes their credit limit, and it may have some restrictions on its use. Lenders may let you borrow up to 85% of the appraised value of your home, minus the amount you still need to pay on your regular mortgage, according to the Federal Trade Commission. Many HELOCs have a fixed period in which to borrow this money, at the end of which the credit can be renewed. Homeowners are provided with special checks and credit cards. (For a more thorough primer, see The Home Equity Loan: What It Is And How It Works.)
Most people use a HELOC to pay for major expenses, such as education, home improvements and medical bills, as opposed to day-to-day bills. As a result, they may not review the account, or they may forget they even have one. Unfortunately, criminals are privy to this lack of awareness and find HELOCs an attractive target.
Mortgage fraud involves misstatements, misrepresentations and omissions by an applicant or interested party, according to the Federal Bureau of Investigation (FBI), and HELOC fraud is a type of mortgage fraud. Criminals have used several methods to rob HELOC accounts, but the FBI has drawn special attention to HELOC identity-theft scams.
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Here's how it happens. Criminals pose as customers – specifically, you. They may get a hold of your personal information through public records. Next, they establish a HELOC internet account and manipulate the customer account verification process in order to get funds. This manipulation occurs by rerouting phone calls, forging signatures and figuring out passwords or using your stolen account history.
For example, the thieves may send a fax to the financial institution and direct the funds to another account. They might provide an email address, physical address or phone number that goes straight to them. So if the lender calls or emails to verify, all they have to do is confirm the account holder's information to complete a wire transfer. (For more, see Stop Scams In Their Tracks.)
In other words, they're using your info – your credit score, the worth of your home – but making sure the money goes to them. One reason criminals are able to get away with this crime: Depending on the circumstances, few documents are needed, especially if the HELOC is being taken out by the lender who holds your mortgage. And the documents checked for the mortgage aren't the same for obtaining a HELOC, anyway. Even if the financial institution calls the holder of the account for verification on his or her actual phone, the criminals can reroute the number so that it's forwarded straight to them.
Anyone with equity in their home can become a victim, especially homeowners with good credit and seniors citizens who've paid off their mortgages.
Identity-theft experts have found that people only learn about the crime when the financial institution calls them about a late payment or they receive written notification of a missed payment (because the thieves aren't paying the funds back, of course). Or they check their credit report, or – in extreme cases – a marshal shows up at their home and they are told to leave their property. (Read Saving Your Home From Foreclosure to learn what you can do to avert this disaster.)
How can you reduce your risk of becoming a target of HELOC fraud? Check your HELOC statements regularly, and examine your credit reports for any inaccurate information. Obtain access to your credit reports from one of the three major credit bureaus (Equifax, Experian and TransUnion) and get a copy of these reports every year. Protect your mail, and be conscious of any changes. (Read more on this process and other reasons for checking your credit rating in The Importance Of Your Credit Rating.)
As a more extreme measure, you could also get a credit freeze. This prevents the three major credit bureaus from giving out information on your credit report until you provide consent, but you'll need to check with your state to find out how local laws will affect the freeze. For instance, you may have to pay additional fees.
If you notice suspicious activity, the first thing to do is to alert your financial institution. Next, you should contact local law enforcement and file a police report. You should also talk to others who may be involved with the account, such as collection agencies, the company that wrote the line of credit and credit reporting agencies. Also, seek assistance from identity theft organizations, such as the Identity Theft Resource Center and the Identity Theft Assistance Center.
When talking to the credit agencies, have the police report in hand and ask that an extended fraud alert be placed on your credit reports. This tells credit grantors that they need to check with you before extending credit in your name. The alert stays on the report for seven years. A copy of your identity theft report, whether from federal, state or local law enforcement, will need to be submitted to the three credit agencies. (For more, read Identity Theft: What To Do If It Happens.)
The Bottom Line
Identity thieves are finding new ways to carry out crimes, but you can stop them from using your home equity line of credit and alleviate headaches by monitoring your line of credit, checking your mail for any suspicious activity and getting a credit freeze. Act quickly if you find out that your credit has been compromised by contacting all institutions involved.