Brad Williams, a 59-year-old disabled Air Force veteran, needed $3,000 for new carpeting and kitchen cabinets, so he applied for a home equity loan.
Four years and several refinancings later he was $63,000 in debt and in danger of being forced out of his Washington home, according to a suit filed against two of the companies that lent to Mr. Williams.
Mr. Williams is not alone. There are five suits pending against one of Mr. Williams' lenders - First Government Mortgage and Investors Corp. of Landover, Md. And complaints about fraudulent and predatory home equity loans are on the rise, especially in the fast-growing area of subprime lending.
"I've gotten more calls about fraud in the last six weeks or so than in the last couple of years," said Robert O'Toole, senior staff vice president for the Mortgage Bankers Association of America.
Many of these calls involve nonbank institutions, which specialize in making loans to the credit-impaired and don't come under the same regulatory scrutiny as banks, he said. The increase is puzzling, Mr. O'Toole said, because both the mortgage business and the economy are healthy.
Wall Street's demand for securitized subprime mortgage products could provide one explanation.
High-yielding subprime mortgage loans have been increasingly securitized in recent years, making the business more lucrative for First Government and other originators.
First Government sells off loans to Contifinancial Corp., New York, and IMC Corp., Tampa, which blend the loans into pools sold on the secondary market.
First Government employees were encouraged to "get the loans through, no matter what it takes," Lolita James Martin, attorney with Martin & James who is representing an employee in a suit against First Government.
She added that First Government's customers "are very unsophisticated, and their loan officers are charming,"
First Government specializes in lending to people with "less-than- perfect credit," the company's advertisements say. The firm makes many of its loans in inner-city Washington and argues that its pricing policies are in keeping with the risk of the loans.
Using a national network of offices, First Government originates about $300 million in home equity loans annually, a company official said.
Nathan I. Finkelstein, attorney for First Government, denied the allegations, saying, "We have followed all government regulations." He said only a few of the thousands of loans originated by First Government have resulted in lawsuits.
According to the suit filed on behalf of Mr. Williams by Skadden, Arps, Slate, Meagher & Flom, First Government "fraudulently misrepresented ... transactions" and "forced unconscionable loan terms upon an unsophisticated customer."
Another suit has been filed by Lillie May DeBerry, an 82-year-old Washington homeowner who borrowed $10,000 at 18% interest for home repairs from First Government in 1991. She paid $1,300 in origination fees. Four years later her loan balance was in excess of $45,000-over half of that to cover fees accrued when she refinanced the loan several times.
First Government's practices amount to "reverse redlining," said Mark Hessel, a Wheaton, Md.-based attorney representing Ms. DeBerry. The company preys on homeowners with "limited income and a lot of equity," making them loans that they can barely afford, he says.
The American Association of Retired Persons has had its eye on First Government since 1991, said Nina Simone, staff attorney with the association. "They were one of the first predatory lending cases we saw, and they haven't gone away," she said.
Suits like those against First Government illustrate the need for an easier-to-understand mortgage origination process, said Laura Borelli, the president of the National Home Equity Mortgage Association.
"As the population ages, this is going to become more of an issue. The best way to protect seniors is clear, simple disclosure," she said.
Ms. Borelli, along with representatives from 10 other trade organizations, is working to reform the Truth-in-Lending Act and the Real Estate Settlement Procedures Act to make mortgage origination documents more streamlined.
Gerald Lilienfield, the founder of First Government, also serves as president of Delaware Federal Savings Bank, a wholly owned subsidiary of First Government. He was one of the founding partners of IMC Mortgage Co., and holds around 1% of the company's stock, IMC said.
At least one of the loans mentioned in the suits was sold to Industry Mortgage Co., a Tampa-based subsidiary of IMC. IMC has no plans to change its policy toward First Government, a spokeswoman said.
