Customers launch a lawsuit against Wells Fargo for illegal home loans cut

The banking unit of Wells Fargo & Co. is facing a lawsuit claiming it illegally reduced the size of customers' home equity lines of credit. The suit, which was filed in Illinois, accuses San Francisco-based Wells Fargo of using unreliable computer models that wrongly valued home prices too low to justify cutting the size of customers` loans.

Besides, Michael Hickman, who filed the lawsuit on behalf of himself and is seeking class action status for it, claims that Wells Fargo 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. The lawsuit said that information was needed so a customer could challenge the change in the credit limit and try and reinstate the previous limit.

Nearly all banks have been hit hard by mounting loan losses tied to residential real estate over the past two years. Reducing lines of credit can limit exposure to the struggling sector. Thus, Wells Fargo set aside $5.09 billion to cover loan losses, which includes potential losses on home equity lines of credit, during the second quarter. It set aside $3.01 billion during the same quarter last year.

The bank was one of hundreds of financial firms that received bailout money from the government last fall amid the mushrooming credit crisis. Wells Fargo received $25 billion as part of the Troubled Asset Relief Program, and has yet to repay the loan. Jay Edelson, a managing partner at KamberEdelson, said systematically cutting home equity lines of credit runs opposite of the goals of the bailout program, which was supposed to improve consumers' access to credit. KamberEdelson LLC is a Chicago-based law firm, which is representing Hickman and other clients that have filed similar suits against JPMorgan Chase & Co. and Citigroup Inc.

Wells Fargo's had average total loans of $833.9 billion during the second quarter, compared with $855.6 billion in the first quarter. When it announced second-quarter earnings last month, Wells Fargo said the decline in total loans was a reflection of actions taken to reduce the size of high-risk loan portfolios and came amid moderating demand for new loans. However, Wells Fargo did ramp up lending in certain areas. It originated $129 billion in mortgages in the second quarter, compared with $101 billion during the previous quarter.