Lawyers filed a class action lawsuit against Chase for illegally freezing Home Equity Lines of Credit in early 2009. The lawsuit alleges that Chase wanted to stop cash outflows during the economic downturn. It couldn’t just “cancel” the HELOCs if homeowners were current in their payments, though. As a result, the lawsuit says, Chase reappraised the properties using:
- NOT an appraiser;
- NOT an appraisal management company;
- NOT a real estate agent Broker Price Opinion or Competitive Market Analysis;
- Instead, they used artificial intelligence software called AVMs-Automated Valuation Models
Because of built-in weaknesses in the AVM, the “appraisal” can be dramatically wrong. Despite that, whenever the AVM said there had been significant decline in the property value, Chase cancelled the HELOCs. “Significant decline” was defined as a 50% decrease in the homeowner’s equity, after taking into account the first mortgage and the HELOC.
If a homeowner disagreed with Chase, then the lender would select an appraiser, the homeowner could pay for the appraisal, and everyone would take a second look at the situation. With the cards stacked that way, would YOU agree to pay for an appraisal?
Some borrowers had to halt remodeling projects. Others were using their HELOC money to make the 1st mortgage payments due to temporary financial difficulties. Many used the money to send children to college. Some used their HELOCs to “even out” cash flows for a business that had historically earned lots of money in one month, and then nothing at all for the next three months–kind of like commercial real estate agents. Everyone found their lines of credit frozen and demands for principal reductions if the software said their homes had declined in value!
Many homeowners were catapulted into foreclosure on their FIRST mortgage. The ripple effects were devastating.
I’ll tell you a story about why using AVMs for decision making is so insane.
Years ago, I was at home in the middle of the day for some reason. The “years ago” part is important because it was before people could check their bills, and pay them, online.
Despite perfect weather, the lights went out! I waited a few minutes for them to come back, but nothing happened. I called the power company to report the problem. The lady I reached told me my power had been disconnected for non-payment! I was outraged! I’d paid the bill within a week of receiving it, on time. I paid it in person, at one of the payment centers. I had a receipt!!!
She was not impressed. I would have to bring my receipt to their downtown offices in order to straighten it all out. While I was arguing with her, the lights came back on. Through my kitchen window, I saw a power company truck leave the cul-de-sac on which I lived.
Triumphantly, I told the lady on the phone: “I TOLD you it was a repair issue, my lights are back on and the repair truck is leaving my neighborhood.”
“Your lights are NOT on, Mrs. Evans,” she said. “You’ve been disconnected for non-payment and your lights are NEVER coming on until you pay your bill.”
I wasn’t a trial lawyer for nothing. I kept arguing. Normal people would have just hung up and preserved their blood pressure. Not me. I wanted to argue with an idiot just to prove a point.
I told her I was right there in the house and the lights were on.
She said, “No they aren’t, Mrs. Evans. I’m looking at the computer and it says your lights are off. They’re off and you need to come pay your bill.” She hung up on me! She thought I was the idiot!!!
THAT’s why we shouldn’t trust computers to do our thinking for us.
To read more about the class action lawsuit, click HERE. We might see more of these lawsuits against other lenders.