WASHINGTON -- The recently passed community development banking bill is too weak to prevent home equity loan scares, a consumer group charged Wednesday.

Lawyers at legal service agencies in 24 cities were surveyed in the report, which was released by Public Citizen. Many said the "most effective" legislative fixes, such as increasing states' authority to cap interest rates and fees, are not contained in the Community Development Banking Act recently passed by Congress.

"The bill lacks some key remedies in dealing with home equity fraud," said Susannah Goodman, legislative advocate for Public Citizen. "The legislation does not apply to mortgages that involve rotating credit and are securitized by a debtor's house."

Interest caps, one remedy suggested by the consumer group, are not a viable answer to the problem of home equity loan fraud, according to Nessa Feddis, senior federal counsel for the American Bankers Association.

"History has shown that interest caps don't work," Ms. Feddis said. "This is not a new idea. If you put caps on credit, you end up cutting the low-income people out of the market. Banks' returns cannot cover high risks."

The legislation, which is on its way to the White House for President Clinton's signature, does contain a provision which provides some protection for home equity borrowers.

Under the provision, called the Home Ownership and Equity Protection Act, creditors offering so-called "high-cost mortgages" will be faced with special disclosure requirements. Buyers of these mortgages will be held liable for any illegal activity that takes place during the origination of the loan.

"Although Congress passed the Home Ownership and Equity Protection Act, it will be meaningless unless it is aggressively enforced," Ms. Goodman said.

Nonetheless, the new legislation is a step in the right direction, according to Jean Davis, legal counsel for the American Association of Retired Persons. One of her clients, an elderly woman who needed money for home repairs, was talked into taking out from a mortgage company a home equity loan for $35,000 with an annual percentage rate of 36%.

"The law is getting stronger," Ms. Davis said. "Her one-year, high-cost balloon loan would have been outlawed by this new legislation."

The report released by the group referred to the sort of abuse experienced by Ms. Davis' client as "reverse redlining." However, this is not really the case, according to Ms. Feddis.

"There is definitely an abuse here, but this is not really reverse redlining because she was not eligible for the loan," Ms. Feddis said. "These are basically highcost mortgages. Banks wouldn't and shouldn't make a loan in this case because she wasn't eligible for one."

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