Fraud and Prevention

New Home Equity Lawsuits Question AVM Validity

By Amilda Dymi
August 26, 2009

A series of lawsuits against some of the country's largest banks brings to the forefront yet another doubt about the reliability of automated valuation models and the thin line between home valuation accuracy and fraud.

Depending on who one asks those taking advantage of the housing depreciation and various home valuation tools may not be just buyers looking for a good deal, but banks as well.

A growing number of banks are facing home equity loan fraud lawsuits that allege they froze millions of dollars in home-equity loans by falsely claiming their customers' home property values had significantly declined.

Last in line is a class-action lawsuit filed in the Northern District of Illinois against Wells Fargo. It alleges the bank "unlawfully failed to accurately assess the value of customers' homes before concluding that there had been a significant decline in property value." The suit claims that after reducing home equity lines of credit and Wells Fargo offered customers high-interest credit cards. (Bank executives could not be reached for comment by press time.)

In June Washington Mutual Bank and its new parent JPMorgan Chase were hit by a number of lawsuits that allege the banks have been arbitrarily reducing or suspending home-equity lines of credit granted to customers who were in good financial standing and undeserving of such action.

"Even putting aside the fact that what they are doing is illegal, there's no justification for denying people these secured credit lines in favor of unsecured high-interest credit cards," says attorney Jay Edelson of KamberEdelson LLC, the law firm that filed such lawsuits not only against Wells Fargo, but also JPMorgan Chase, WaMu and Citibank over their respective HELOC account suspension practices.

The Wells Fargo suit filed on behalf of Michael Hickman of Westmont, Ill., claims the credit limit on his HELOC account "was reduced due to a supposed substantial decline in the value of his home." The suit states that in reality "Mr. Hickman's home and the homes of thousands of other class members did not substantially decline in value; rather, Wells Fargo used a variety of unreliable computer models to produce artificially deflated values."

Furthermore it alleges that Wells Fargo failed to provide customers with proper notice of the reductions and in addition, "improperly required customers to seek reinstatement by paying upfront for their own property appraisals." Following the reduction of his HELOC credit limit, Wells Fargo offered Mr. Hickman a higher limit on one of his higher-interest credit cards.

"In this economy, what Wells Fargo and other lenders are doing to everyday customers like Michael Hickman is simply unconscionable," says Mr. Edelson whose firm operates in Chicago, New York, Los Angeles and Florida.

The class-action federal lawsuit filed against Washington Mutual Bank and JPMorgan Chase claims the banks were engaged in substantial reductions of home-equity lines of credit limits and the suspension of various accounts based on false assertion that these borrowers' incomes had been reduced.

According to the lawsuit filed in Cupertino, Calif., on behalf of Jeffrey and Jennifer Schulken, the banks froze millions of dollars in home loans based on inconclusive evidence and by breaking their written responsibility to provide customers with a two-week notice to provide updated income information before suspending their HELOC account.

According to KamberEdelson, Mr. and Mrs. Schulken's account was suspended "due to a supposed inability to pay the loan" even though the couple - who run their own small business - "continued to earn the same amount of money and never missed a payment."

Mr. Edelson recognized that federal regulations permit account suspensions when a customer's financial circumstances change, but it also requires "both a material change in a borrower's financial situation and the creditor's reasonable belief that the borrower will not be able to repay the HELOC account as agreed."

The lawsuit alleges that was not the case with Mr. and Mrs. Schulken so Chase and WaMu did not have such basis.

Two similar lawsuits were filed in Henderson, Nev., and Garden Grove, Calif.

Michell Kimball v. Washington Mutual Bank in Henderson filed by KamberEdelson alleges that the bank used faulty automated valuation models to create a pretext for its credit limit reduction and account suspension actions. According to the lawsuit, Ms. Kimball, a local businesswoman, first learned her HELOC had been frozen when a check she had drawn on the line had been dishonored and, when she called customer service, they informed her that an AVM showed the property value had significantly declined. Using the bank's chosen appraiser, an onsite examination showed the property was worth 1.5 times the AVM's estimate.

The lawsuit filed by Sherman Oaks attorney David Parisi on behalf of Garden Grove resident Michael Walsh also alleges that Chase and WaMu reduced his credit limit after claiming his home had significantly declined in value. The lawsuit disputes the bank's practice of freezing HELOC accounts based on lower declines in value than those permitted under the federal Truth in Lending Act. Furthermore, as in Michell Kimball v. Washington Mutual Bank, it alleges the use of a faulty AVM.