Tarp moralizing makes its way into the courts with Wells Fargo complaint

The moral protest over the idea of bank bailouts has made its way into the court system. A lawsuit filed yesterday in Illinois charged Wells Fargo with violating fair lending laws by lowering a home equity borrower’s line of credit based on an unsubstantiated appraisal of his house. The complaint is a class-action suit representing all of the home equity borrowers who were similarly hit with reduced credit lines, but it also appeals to a vaguer sense of inequity with a passage highlighting Wells Fargo’s $25 billion share of handouts from the Troubled Asset Relief Program.

“In addition to Defendant’s mass HELOC reductions being illegal, they are unconscionable in light of Defendant’s receipt of billions of dollars in taxpayer funds,” the complaint reads. It recounts the history of the Tarp legislation and Wells Fargo’s subsequent bailout. “The rationale advanced for the bailout was that banks like Defendant needed liquidity in the face of the worsening subprime mortgage crisis and that such liquidity would be necessary to ensure the continued flow of credit to consumers,” the text continues. “On the contrary, Defendant has deprived its customers of crucial affordable consumer credit at a crucial time, even though its customers continue to meet their mortgage obligations in this faltering economy.”

Whether it plays a material role in the case remains to be seen, but this much is clear: The taint of Tarp has seeped into the proceedings of banks’ interactions with customers and its boundaries have yet to be defined. It will be hard to predict how long the effects of this handicap will last—much of that will depend on the banks’ behavior and the public’s perception of them. Although in Wells’ case, repaying the Tarp money would be start.