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Wells Fargo Being Sued Over Home Equity Loans

I can't muster much excitement over the news, reported by the Associated Press, that a customer of Wells Fargo has filed suit in an Illinois court against the lender, claiming it improperly reduced his home equity line of credit. The borrower, Illinois resident Michael Hickman, and his lawyers are trying to get class-action status for the suit. They say Wells Fargo inappropriately reduced credit lines using a faulty computer model and improperly notified borrowers of the change. Wells Fargo responded with a statement defending its lending models.

Even if Hickman and his lawyers succeed with a class-action suit, borrowers who join such a suit would probably walk away with a pittance in compensation. By the time lawyers' fees and expenses are subtracted from most class-action settlements and the remainder is divided among all the members of the class, the settlement pie has been minced to crumbs.

Regardless of the merits of the suit, we may all be better off with lower HELOC lines anyway. Remember, during the boom, when lenders would approve a 100 percent--or higher-- loan-to-value ratio (considering both the first and second mortgage)? When you would refinance, lenders would offer you a cheap and easy HELOC as a little bonus on the deal. Think "do you want fries with that?" It turned out to be not such a painless add-on after all.

Has your line of credit been reduced? Do you think it was done fairly? And has a home equity line of credit been a help to your finances--or a burden?

By Elizabeth Razzi  |  August 20, 2009; 10:19 AM ET
Categories:  Mortgages  
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Only good that I can see coming out of this is if WF agrees to reinstate the credit lines (presuming they were improperly reduced). Anything else will just be lawyers' fees.

While I do think we're all better off in the long run with less easy credit, a lot of people were hurt in the short-term. I don't think anyone understood that credit lines could -- or would -- ever be slashed with no notice or recourse. If you were in the middle of a remodel and suddenly couldn't pay the builder because the bank reassessed its credit risk, what exactly were you supposed to do? Or what about the folks who had planned on using their existing HELOC to pay for college, etc.? The student loan market froze up at exactly the same time, which made for a nice double whammy.

I think some sort of process and appeal would be a more reasonable approach. Our bank notified us in advance that they were reassessing and asked for a lot of financial information before they made their decision (no cuts as of yet, but we'll see). That at least gives folks time to make alternate plans.

Posted by: laura33 | August 20, 2009 1:37 PM | Report abuse

The people who benefit most in class actions are the attorneys.

Still, the legal point about this dispute is well taken.

Even a bank cannot unilaterally alter the terms of a contract.

If they could, it would not be a contract.

The banks and credit card companies have been setting up "contracts" with consumers that have clauses in them that say the lender can change the terms all by himself.

I don't know what that is, maybe the government bank in Russia can do that, but here in the US a contract is a bargained for agreement with a meeting of the minds.

It is elementary, that an agreement to agree is not a contract.

Posted by: nospit | August 20, 2009 7:03 PM | Report abuse

And another thing.

The formulas are wrong.

Using them as a justification to unilaterally change the terms of a loan
is bogus.

What is hurt mostly by banks irrational behavior is the US economy.

When banks and credit card companies unilateraly and unpredictably slash credit lines and raise interest rates to unjustified levels theoretcially based on these hokey scoring systems, small business is not going to be able to plan to expand and create new jobs, consumers are not going to spend, and the US economy is going to shut down.

Posted by: nospit | August 21, 2009 10:18 AM | Report abuse

Wells Fargo has raised my mortgage payments twice in the last five months without notifying me. I can not get any response from them.

Amazing - worst place ever to do business with. My mortgage was sold to them!

Posted by: auntlumi | August 23, 2009 11:13 PM | Report abuse

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