The banking unit of Wells Fargo & Co. (WFC) has been accused by an Illinois homeowner of illegally reducing the size of customers’ home equity lines of credit by undervaluing customers’ houses.

Home equity lines of credit allow homeowners to borrow against their homes up to specified limits. Home equity lines of credit are similar to credit cards, as in both the facilities customers have a credit limit and can continue to borrow money until the limit has been reached. Once a portion is paid off, it again becomes accessible to borrow. But home equity lines of credit are backed by a borrower’s property, whereas credit cards are unsecured.

The suit alleges that Wells Fargo of using unreliable computer models that wrongly valued home prices too low to justify cutting the size of customers’ loans.

Michael Hickman filed the lawsuit seeking class action status for it and claims that 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 value of the houses. Had the information been available, customers could have challenged the change in the credit limit and try and reinstate the previous limit.

Wells Fargo, however, remains confident of its lending practices being fair and responsible and is based on contractual and regulatory guidelines, including the method of determining home equity credit limits available to customers depending on the amount of equity in their home.

Hickman is being represented by KamberEdelson LLC, a Chicago-based law firm, which is also representing clients with similar suits filed against JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C). The suit asserts that cutting home equity lines of credit was contradictory to the goals of the bailout program, which was supposed to improve consumers’ access to credit by spurring lending and thereby bolstering the economy.

The banking industry has been devastated by mounting loan losses tied to residential real estate. The banks reduced lines of credit to limit exposure to the riskier loans, in order to cope with a recession and a three-year housing downturn. Wells Fargo received $25 billion in bailout money under Troubled Asset Relief Program from the government to weather the credit crisis.
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