NEW YORK -- The banking unit of Wells FargoWFC is facing a lawsuit claiming it illegally reduced the size of customers' home equity lines of credit.
The suit, which was filed in Illinois, claims Wells Fargo failed to accurately assess the value of customers' houses before deciding to cut the size of their credit lines. San Francisco-based Wells Fargo is being accused of using unreliable computer models that wrongly valued home prices too low to justify cutting the size of customers' loans.
Home equity lines of credit are similar to credit cards in that a customer has a credit limit and can continue to borrow money until the limit is reached. Once a portion is paid off, it again becomes accessible to borrow. But, home equity lines of credit are backed by a borrower's property, whereas credit cares are unsecured.
Michael Hickman, who filed the lawsuit on behalf of himself and is seeking class action status for it, claims Wells Fargo also did not provide proper notice that the bank was reducing the size of the credit lines.
The bank's notice for reducing the lines also did not specifically provide a new estimated value for the property or the method used to determine the houses value. Hickman's lawsuit said that information was needed so a customer could challenge the change in the credit limit and try and reinstate the previous limit.
Hickman is being represented by KamberEdelson, a Chicago-based law firm, which is also representing clients that have filed similar suits against JPMorgan Chase and Citigroup.
Nearly all banks have been hit hard by mounting loan losses tied to residential real estate over the past two years. Reducing lines of credit can limit exposure to the struggling sector.
Wells Fargo set aside $5.09 billion to cover loan losses, which includes potential losses on home equity lines of credit, during the second quarter. It set aside $3.01 billion during the same quarter last year.
The bank was one of hundreds of financial firms that received bailout money from the government last fall amid the mushrooming credit crisis. Wells Fargo received $25 billion as part of the Troubled Asset Relief Program, and has yet to repay the loan.
Jay Edelson, a managing partner at KamberEdelson, said systematically cutting home equity lines of credit runs opposite of the goals of the bailout program, which was supposed to improve consumers' access to credit.
Wells Fargo's had average total loans of $833.9 billion during the second quarter, compared with $855.6 billion in the first quarter. When it announced second-quarter earnings last month, Wells Fargo said the decline in total loans was a reflection of actions taken to reduce the size of high-risk loan portfolios and came amid moderating demand for new loans.
However, Wells Fargo did ramp up lending in certain areas. It originated $129 billion in mortgages in the second quarter, compared with $101 billion during the previous quarter.
Wells Fargo did not immediately comment on the lawsuit.