Despite recent assurances by CEO’s that banks are using the $700 billion in taxpayer TARP funds to lend money to cash-strapped home and business owners, Washington Mutual Bank ("WAMU") and its new parent, JPMorgan Chase ("Chase") (NYSE:JPM), are not only failing to live up to their promises, they are squeezing consumers by freezing or reducing their home equity lines of credit, according to a federal class action lawsuit filed June 10th.
The suit alleges that WAMU, which is now operated as a division of Chase, has been systematically reducing and freezing customer’s home equity credit lines.
According to the suit, filed in the Southern District of California, the banks used flawed automated valuation models (AVM’s) to intentionally understate home values so they could create a pretext for freezing its customers’ HELOC accounts.
The lawsuit is brought on behalf of Michell Kimball, a small businesswoman in Escondido, California. Kimball first learned that Chase had frozen her WAMU credit line when a check she had drawn on the account was dishonored.
Chase’s actions threatened her home and the viability of her business. According to Kimball: "Because I didn’t have access to my credit line, I was unable to pay my suppliers. I was able to negotiate extensions from them, but if not, I’m not sure what would have happened."
The lawsuit alleges that when Kimball contacted customer service, Chase claimed that an AVM showed Ms. Kimball’s home had lost a significant amount of its available equity. The bank refused to provide information to support that assessment.
A later appraisal told a different story: It showed that the home was actually worth more than 1.5 times Chase’s AVM estimate.
After Kimball’s lawyers intervened, Chase restored her credit line, but did not reimburse her for her losses.
The lawsuit seeks class action treatment for Chase and WAMU’s actions in the reductions, alleging that Chase and WAMU have intentionally used inaccurate formulas to produce low-ball home valuations as a false justification for freezing thousands of such credit lines.
Although federal law mandates that a significant drop in value must first occur and requires that banks act with a sound factual basis in each case, the lawsuit claims that these banks are doing whatever they can to reduce HELOC credit limits or suspend the lines altogether – even if it means, in some instances, ignoring the law.
"The message to former WAMU customers and others is clear: Chase is coming after your home equity credit line," said attorney Jay Edelson, whose firm, KamberEdelson, LLC, previously filed a similar lawsuit against CitiBank. "When banks take billions of dollars in taxpayer money, they have an extra duty to follow both the letter and the spirit of the law. We believe that congressional hearings should commence immediately," Edelson explained.
Edelson is joined on the suit by KamberEdelson attorneys Michael McMorrow, Steven Lezell and Alan Himmelfarb.