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Wells Sued for Using AVM in Decision to Cut HELOC

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A Chicago borrower is serving as lead plaintiff in a class action against Wells Fargo Bank, N.A. The lender is accused of illegally relying on a home value determined by an automated valuation model as its basis for cutting the borrower’s home-equity line-of-credit.

The lawsuit was filed by Michael Hickman Wednesday in U.S. District Court for the Northern District of Illinois.

Hickman originally obtained a $75,000 HELOC from Wells in May 2006, the lawsuit says. In October 2008, he received a letter telling him that his HELOC credit limit was cut to $31,040 — despite that his home’s value had not significantly declined. The new limit approximated his loan balance at the time.

When he subsequently contacted the bank to determine the basis for its decision, Wells reportedly responded by indicating it had used an AVM to determine the value of the property. But, the plaintiff claims no individual assessment was actually done on his home value.

In a statement to, Wells spokesman Kevin Waetke said that an initial review of the lawsuit “appears to mischaracterize credit controls designed to sustain homeownership.”

“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” the statement said. “Our controls are based on contractual and regulatory guidelines and include a fair appeals process.”

Hickman claimed that his credit score fell because the lower limit pushed his line utilization rate up.

But Hickman reportedly received a $4,000 credit line increase on his Wells Visa credit card just three months after his HELOC was reduced.

Despite the credit line reduction, he was still charged an annual fee of $75.

The San Francisco-based institution allegedly began sending thousands of letters to HELOC borrowers in October 2008 telling them that their lines had been reduced because of falling home values.

“The methodology used with respect to defendant’s AVM HELOC modeling is inaccurate and unsubstantiated, making its us unfair, deceptive and readily subject to manipulation,” the lawsuit states.

The plaintiff claims that because Wells conducted the AVM five months prior to cutting the line, the estimated value was not legitimate. In addition, Truth-in-Lending Act’s Regulation Z violations are alleged because Wells required the plaintiff to pay for a property appraisal up front in order to appeal the line cut.

The lawsuit indicates that the credit-line reduction was illegal because Reg Z prohibits a lender from cutting HELOC lines without first assessing the specific value of the property and without having a sound basis for the reduction. In addition, Wells allegedly did not comply with requirements that its notices specifically describe the actions taken because it didn’t explain how it determined the values.

The case cites Office of Thrift Supervision: Guidance on Home Equity Lines of Credit, OTS 08 038, issued on Aug. 26, 2008, that reportedly reinforced the plaintiff’s position (Wells is regulated by the Office of the Comptroller of the Currency).

“This is a case about defendant Wells Fargo’s illegal reduction of credit limits on home-equity lines-of-credit across the country in a transparent and illegal attempt to limit exposure to the troubled U.S. housing market by breaking its promises to homeowners who obtained credit from the defendant,” the complaint says. “Defendant originated and owns billions of dollars of prime and subprime mortgages, including the HELOCs at issue.”

Wells Fargo reported $107 billion in junior lien investments as of June 30.

Attorneys in the case, who are seeking class-action certification, seek damages and relief under the Illinois Consumer Fraud and Deceptive Business Practices Act.

Michael Hickman, an individual, on his own behalf and on behalf of all others similarly situated, Plaintiff, v. Wells Fargo bank N.A., Defendant.

Case 1:09-cv-05090, Aug. 19, 2009 (U.S. District Court for the Northern District of Illinois)

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