NEW YORK (Reuters) - An Illinois homeowner accused Wells Fargo & Co, the largest U.S. mortgage lender, in a lawsuit of summarily cutting home equity lines of credit by undervaluing customers’ houses.
In a federal lawsuit filed in Chicago on Wednesday that seeks class-action status, homeowner Michael Hickman accused the bank of using “dubious” computer models that systematically undervalue homes, depriving customers of credit.
The case is the latest challenge to a banking industry that has tried to reduce exposure to loans that may be riskier, in order to cope with a recession and a three-year housing downturn.
But restricting access to credit can clash with federal government efforts to spur lending and bolster the economy.
Hickman, 46, who lives in the Chicago suburb of Westmont, complained in the lawsuit that Wells Fargo reduced his credit line by 59 percent to $31,040 from an original $75,000 in October because of an alleged “substantial decline” in the value of his home.
In his complaint, Hickman said that because the new limit was just above what he had borrowed, his “credit utilization rate” increased, damaging his credit rating and boosting his borrowing costs.
The lawsuit says that San Francisco-based Wells Fargo violated the U.S. Truth-in-Lending Act and Illinois consumer fraud laws. It seeks punitive damages and several other remedies.
Home equity lines of credit let homeowners borrow against their homes up to specified limits.
Kevin Waetke, a Wells Fargo Home Mortgage spokesman, said “our controls are based on contractual and regulatory guidelines and include a fair appeals process.”
He said the bank’s lending practices are fair and responsible, and said the lawsuit “appears to mischaracterize credit controls designed to sustain homeownership.”
Last month, Illinois Attorney General Lisa Madigan accused Wells Fargo in a lawsuit filed in Cook County Circuit Court of steering blacks and Hispanics into higher-cost subprime loans.
The fourth-largest U.S. bank by assets faces similar lawsuits elsewhere. It bought Wachovia Corp at year end.
Wells Fargo ended June with $126.8 billion of home equity loans and lines of credit on its books, down from $128.7 billion at year end.
In a $117.5 billion “core” home equity portfolio, 2.65 percent of borrowings were at least two payments past due, up from 2.27 percent at year end, the bank said.
The reduction in Wells Fargo’s home equity book came even as the bank lent more elsewhere.
Wells Fargo said it made $129 billion of mortgage loans in the second quarter, up from $101 billion in the first quarter and $63 billion a year earlier.
Shares of the bank were up 18 cents at $26.52 in late afternoon trading on the New York Stock Exchange.
The case is Hickman v. Wells Fargo Bank NA, U.S. District Court, Northern District of Illinois (Chicago), No. 09-5090.
Reporting by Jonathan Stempel, editing by Leslie Gevirtz