In the summer of 1996, Juanita Sweeney of Wilbur, Ky. opened her door to a salesman who said he represented a home improvement contractor. She wound up with a $17,000 loan she didn't ask for-and a big headache fending off an attempt to foreclose on the house where she and her four children lived.
"They didn't ask how much I made or how I would pay it back, they just told me that they would let me have the money," Ms. Sweeney said. "I really didn't want to borrow that much ... but they just kept pressuring and pressuring, so finally I went along."
If her predicament sounds familiar, there is good reason. Complaints like Ms. Sweeney's are all too common in the home equity sector, according to the Federal Trade Commission.
"I would say that this market demonstrates some of the most abusive anti-consumer overreaching that I've ever seen," said Robert Pitofsky, chairman of the commission. "In addition to that, we find extraordinarily abusive credit terms and practices."
Ms. Sweeney was among the borrowers who are to get money back under a settlement with seven home equity lenders that the commission announced last week.
The subprime borrowers whom home equity lenders cater to are "often unsophisticated and low-income; that's the reason they had credit problems in the first place," Mr. Pitofsky said.
The loans are usually in the $20,000 to $30,000 range, but it is not a small market. Last year $150 billion of subprime loans were made, 58% more than the year before.
About 10% of all mortgage loans fall into this category.
With a conventional lender, borrowers may pay 8% to 10% in up-front fees; but in the home equity market, borrowers frequently pay 12% to 16% up-front.
The seven lenders named in the settlement were charged with violating the Home Ownership Equity Protection Act, the Truth-in-Lending Act, and Federal Trade Commission rules that bar deception in home equity transactions.
A common trick, according to the FTC, is failing to warn borrowers that missing payments can cost them the property. Hidden balloon payments, disguised prepayment penalties, and increases in interest rates in the event of default and refinancing are also frequent illegal practices.
Another abuse that Mr. Pitofsky says is rampant in the home equity industry is making loan a knowing the borrower is likely to default.
"According to the National Consumer Law Center, foreclosures on home equity loans have tripled since 1980, with more than 500,000 families losing their homes," said Anne Harvey, director of program development and services for the American Association of Retired Persons. Many of the victims were seniors.
"Legitimate lenders do not use door-to-door salesmen or home improvement contractors to drum up business," she said. "This is an aggressive strategy."
Ms. Sweeney was told that her home equity lender was North American Lending Corp., and all the papers that she was shown bore that name. It was not until closing that she learned that LAP Financial Services of Louisville, Ky., was the lender.
Though Ms. Sweeney got the loan, the contractor LAP agreed to hire never performed the repairs. She was not given pre-disclosure forms and information. And she was never told what her monthly payment would be until she got to the closing.
"All these things suggest that LAP's interest in lending Ms. Sweeney the money was not to fix up the house, but to set it up for failure and foreclosure," her legal aid attorney said.
Ms. Sweeney is in line to receive $4,100 of the $250,000 in restitution that LAP has agreed to pay. The payment in effect nullifies prepayment penalties it had assessed illegally.
Other home equity lenders cited in the suit were Barry Cooper Properties of Encino, Calif.; CLS Financial Service Inc. of Lynnwood, Wash.; Granite Mortgage LLC of Lexington, Ky.; Interstate Resource Corp. of Newburgh, N.Y.; and Wasatch Credit Corp. of Salt Lake City. The firms were ordered to repay from $25,000 to $250,000.
Additionally, Capitol Mortgage Corp. of Provo, Utah, was banned from any involvement with high-cost loans secured by consumers' homes. Wasatch Credit and Barry Cooper will have to obtain performance bonds in order to make certain types of home equity loans.
Most of the lenders refused to comment. But James Ludlow, president of Interstate Resource, complained that his company's name "should have never been associated with predatory lenders."
"Ours was a technical violation, related to language about disclosure that was strictly interpretorial to the FTC," Mr. Ludlow said. "We feel we would have won if that had gone to court, but it was cheaper to settle than to keep on defending. Our legal fees were already more than the settlement."
