In a harsh slap attributed to the housing bust, solid bank customers across the country have seen their home equity credit lines slashed or erased entirely by lenders who say, regretfully, that their property values have fallen.
Some put-upon borrowers are now striking back with lawsuits contending that the banks have wrongfully restricted credit based on flawed automated software, which exaggerated declines in home prices.
A federal lawsuit filed against Wells Fargo & Co.'s banking unit Tuesday argues that federal law requires a lender planning to reduce a line of credit to reappraise the underlying property individually or to have "another sound basis for reducing or suspending the credit line."
Instead, Wells Fargo Bank employed "unreliable computer models" that generated "artificially deflated" home values, according to the complaint brought by homeowner Michael Hickman of Westmont, Ill.
The suit, filed in U.S. District Court in Chicago, asks the court to certify it as a class action representing all borrowers nationwide whose situations are similar to Hickman's.
"In this economy, what Wells Fargo and other lenders are doing to everyday customers like Michael Hickman is simply unconscionable," attorney Jay Edelson of Chicago said in a news release announcing the lawsuit.
Edelson's firm has similar suits pending against Citigroup Inc. and JPMorgan Chase & Co., including Washington Mutual Bank, which was acquired by JPMorgan last year.
Wells Fargo said it had not fully reviewed the lawsuit.
A statement released by Des Moines-based Wells Fargo Home Mortgage said: "We are confident in our fair and responsible lending practices, including how we determine home equity credit limits available to customers depending on the amount of equity in their home. Our controls are based on contractual and regulatory guidelines and include a fair appeals process."
The lawsuit "appears to mischaracterize credit controls designed to sustain homeownership," Wells Fargo said.
Home equity lines of credit are a type of second mortgage that can enable homeowners to draw against a property's increased value to pay for home improvements, college expenses, vacations or anything they wish. They typically carry lower interest rates than credit cards, and the interest may be tax deductible, making them especially attractive.
The terms of the credit lines typically include provisions that if a decline in home values reduces the homeowner's equity in the property to a specified level, the credit line can be cut off or reduced to protect the bank.
During the housing boom, lenders such as Wells Fargo made home equity lines of credit readily available, even allowing some home buyers to use a credit line to make a 20% down payment while taking out a mortgage for the remaining 80% of the property value. Having suffered huge losses on home lending, banks more recently have been trying to cut back on their exposure to falling prices.
The lawsuit against Wells Fargo seeks unspecified damages and a declaration that the bank's mass reduction of home equity credit limits is illegal.
It contends that the bank aggravated the damage to Hickman three months after reducing his home equity credit line by notifying him that the limit on his Wells Fargo Visa credit card, which carried a higher interest rate, had been increased to $24,000 from $20,000.
"This is the type of greed that led to taxpayers' having to bail out banks like Wells Fargo in the first place," Edelson said.
The lawsuit contends that the mass reductions in credit limits are "unconscionable" because Wells Fargo received $25 billion in taxpayer bailout funds last fall "to ensure the continued flow of credit to customers."
Despite that boost, the suit contends, Wells Fargo "has deprived its customers of crucial affordable consumer credit at a critical time, even though its customers continue to meet their mortgage obligations in this faltering economy."