Before 2008, home equity lines of credit (HELOCs) were available at modest fees and low rates of interest, which was often tax deductible.
According to Frank Hirsch, Jr., partner and co-chair of Alston & Bird’s Financial Services Litigation Group, banks relied on automated valuation models (AVMs) in place of traditional appraisals to freeze individual credit lines in entire neighborhoods.
Hirsch says the widespread use of computerized appraisal models has never been tested in the courts and present several legal questions. Among them: How reliable are automated valuation models? Can banks be required to disclose their testing procedures and results? Does the Truth in Lending Act significant-decline provision permit freezes based on computerized models?
Hirsh noted that the industry does not have standards for automated valuation systems, so banks use a variety of models.
“Ultimately, the battleground is whether plaintiffs can get class certification,” he said. “Banks may be required to turn over information about how AVM methods work and that may crystallize the class issue.”