Homeowners who thought they had squirreled away some rainy day protection in the form of Home Equity Lines of Credit got a rude shock when the mortgage crisis hit in 2007. Scared banks began suspending the lines of credit, known as HELOCs. This was often done based on computerized valuation models for geographic areas that had nothing to do with an individual home’s value.
The modeling allowed Citibank and others to suspend customer accounts based on supposed significant declines in the value of their homes, whether it was accurate or not.
On Friday, Citigroup Inc. agreed to settle a class action challenge in San Francisco federal court, giving homeowners whose HELOC accounts were closed the right to make a claim for $120 each. In addition, the class lawyers will be paid $1.2 million. The settlement document filed does not indicate how many class members may qualify or the total amount of the award.
The lawsuit, filed in 2009, accused Citibank of suspending or reducing HELOCs in violation of federal Truth-in-Lending Act and California’s Unfair Competition Law.
The HELOCs became significant to consumers who had gotten them because as the recession deepened and people lost jobs, it was possible to draw on the line of credit to pay bills and keep the family afloat while looking for work.
Families relied on these lines of credit for a wide array of financial plans from paying for a child’s college tuition at a low interest rate or to protect against medical emergencies.
One typical family, Jeffrey and Jenifer Schulken, were Cupertino day care operators who used the line of credit to remodel their house to accommodate the business and smooth the cash flow to cover big bills like property taxes.
In 2009, Washington Mutual froze their $250,000 line of credit, even though they had used just $124,000 of the half-million in equity in their home.
Washington Mutual settled their separate class action in July before Judge Lucy Koh, Schulken v. Washington Mutual Bank, C09-2708LHK (N. Dist. Calif.)
Still other suits were settled with Wells Fargo Bank and JP Morgan Chase Bank.
All of these cases alleged that banks, “in a rush to slash and freeze HELOCs en masse, overcorrected and ended up suspending many borrowers’ HELOCs without a legal basis for doing so.”
The Citibank agreement includes several non-monetary terms. Citibank would agree, in future, to notify borrowers of their right to challenge a suspension of their account, improve suspension notices and restore borrowers’ access to their suspended HELOC accounts, according to the court papers.
The Citibank suits were brought in 2009 by David Levin and Mark Winkler. Their suits and others against Citibank were eventually combined in 2010. The settlement calls for an incentive award of $36,000 to be divided equally among six class representatives.
The settlement must be approved by U.S. District Judge Maxine Chesney in a hearing tentatively set for September 21.
Case: In re Citibank HELOC Reduction Litigation, No. 09-CV-350MMC