Just like that, home equity line cut in half

Carolyn and Joe Mottola signed a contract for a new house Aug. 14. They deposited a $5,000 check written on their home equity line of credit at Wachovia. That same evening, they opened a letter from Wachovia dated Aug. 11 saying that their $100,000 line of credit had been suspended.

The reason, according to the bank's letter, was that the value of their Orange County home had declined. It was, the letter said, worth $189,000.

That seemed odd to the Mottolas, because they had just contracted to sell their home for $419,200. Mottola said he and his wife have excellent credit, that they had borrowed very little from the line and had never missed a payment.

The couple immediately called the bank to offer their selling contract as proof that the home's value was much higher. They were told that they would have to submit an appraisal -- at their own expense. Over the next few days, as the couple haggled with the bank, the $5,000 check was returned because of insufficient funds. The bank issued a new check, but not before the ordeal caused the couple headaches and restless nights.

"This is the most frustrating thing I have ever been through," Joe Mottola said. "You are powerless to deal with these people."

The Mottolas' situation is hardly unique. Over the past year, hundreds of thousands of people across the country have gotten similar letters from their financial institutions as home values decline and banks try to minimize their risk. Wachovia sent such letters to 3 percent of their prime customers, spokeswoman Christine Shaw said.

These actions by the bank significantly reduce consumers' access to cash and in many cases affects their credit scores.

Your credit rating drops the closer you get to your credit limit. So if the bank cuts your $100,000 credit line in half and you have a $30,000 balance, your credit score will be negatively affected.

The trend has prompted both the FDIC and the Office of Thrift Supervision, which is in charge of savings and loan institutions, to issue guidance to remind lenders that if they decide to reduce or suspend a home equity line of credit, certain legal requirements designed to protect consumers must be followed.

I reviewed some of those rules online at fdic.gov/news/news/financial/2008/fil08058a.html. They didn't seem to offer a lot of consumer protection. Besides requiring banks to notify you in writing, I saw no specific formulas on how a bank is supposed to determine the value of your home.

Luke Brown, associate director of compliance at the FDIC, confirmed my impression.

"It's done differently by different lenders," he said about the valuation process. Brown said that most banks use some type of automated valuation process.

That's what Wachovia did to the Mottolas, Shaw said.

Shaw said the bank's automated valuation was based on an internal formula that included the house's original value, the mortgage balance and information provided by an independent third party. She did not say who the third party was or what kind of information it provided.

In the Mottolas' case, the new valuation dropped the couple's equity lower than Wachovia's guidelines allowed.

Shaw said that when a customer's home equity decreases by at least 50 percent, the bank can suspend the line or reduce the amount of credit the customer can have.

So what can consumers do to protect themselves?

Apparently very little, according to Holden Lewis, a senior reporter at BankRate.com

Consumers can challenge the value, but they will have to pay for the appraisal. Lewis recommends that before going out to have an appraisal done, you talk with your bank and ask whether it has a list of approved appraisers you can use.

Even if your appraisal results in a higher value than the bank's, there is no guarantee that it will restore your credit line, Brown said.

"At the end of the day, a lender has to make an underwriting decision."

The Mottolas opted not to get the appraisal, because they had already sold the house, and Wachovia had already made good on their check.

But Joe Mottola is still upset that the bank would do something like that to good customers.

"This is just another example of how a large corporation can walk all over the little guy. They basically mess up people's plans and lives and do not respond to accurate and realistic information."

Need a little extra cash? Check out the free site, www.missingmoney.com. The site is similar to the one operated by the Department of the State Treasurer, www.nccash.com, but it searches all states. The results don't say exactly how much money is owed to you, only if the amount is more or less than $100.