Cutting Home Equity Lines

In more bank lawsuit news, Wells Fargo is being sued due to at least one customer being angry about the bank decreasing his home equity line of credit. These lines of credit are kind of like credit cards, except the amount of credit available is based on the equity you have in your home. Once the housing bubble popped, virtually all banks began reining these credit lines in. As home prices decreased, so did the equity that people thought they had in their homes. The plantiff believes that Wells Fargo went too far.

Here's some detail from the Associated Press:

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.

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.

From a strict legal sense, whether or not this case has legs depends on the language in the contract signed the bank and its borrowers. If it included required notice time less than provided and a strict relationship between the size of the credit line and the home value, as well as how to perform that valuation, then Hickman might have a case. If not, then he's pretty likely wasting his time. Generally banks have lots of power to reduce credit lines for whatever reason they please. I know I've talked to quite a few people with great credit who had their home equity lines reduced in Florida after the real estate market there tanked. Some lines were closed entirely.

This story also makes me think about credit cards, and Congress' recent regulation in that industry. Since there are so many similarities between credit cards and home equity lines, Congress could have easily attempted to regulate both markets simultaneously. They could have created legislation preventing "arbitrary" line increase or interest rate increases for home equity lines of credit as well.

In general, however, it seems like banks should have the right to reduce credit lines if they believe that a risk factor has changed. Otherwise, they would have to treat these credit lines as loans, and likely price them higher in order to incorporate the greater risk that 100% utilization of the credit line would imply.