Home-equity lenders need to rev up their risk management practices, says the guidance jointly issued by regulators including the Federal Reserve, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision.

The boom in home-equity lending that increased the volume of lending to $881 billion at the end of 2004, 80% up from $492 billion in 2000, threatens with a surge in defaults. So far relaxed payment requirements and lending terms have kept delinquency rates relatively low, but the regulators have decided to get ahead of possible dangers. They are especially concerned about loans that require little documentation of a borrower’s assets, interest-only payment plans, and loans with a high loan-to-value ratio. Besides, loans that are extended by third-party brokers are raising concerns since they do not always adhere to the same standards as the banks.

"Management should actively assess a portfolio’s vulnerability to changes in consumers’ ability to pay and the potential for declines in home values," the regulators said.

Danger is foreseen from a quick rise in interest rates that contributes to a surge in payments on adjustable-rate mortgages that vary in accordance with rate fluctuations.