A Westerfield, Ohio-based mortgage company that does business in 23 states has agreed to settle federal and state charges that it deceived borrowers about the terms of its loans.

The company, Mercantile Mortgage, has agreed to pay $250,000 to redress consumers and create a program to refinance aggrieved borrowers at more favorable terms. But more important, it has agreed to take responsibility for the actions of a third-party said to be responsible for many of the deceptive mortgages.

It is the first time the Federal Trade Commission has charged a mortgage lender for the actions of an unaffiliated loan broker.

The complaint charged that Mercantile and two of its officers misled borrowers by misrepresented or concealing the fact that its 15-year loans had a large, lump sum "balloon" payment at the end of the term.

In most instances, 80 percent of the loan amount was still outstanding when the balloon payment kicked in.

The complaint also charged that the company made a number of other misrepresentations about key terms and costs, including the interest rates, monthly payments and prepayment penalties.

In a separate matter, the FTC and the State of Illinois also have filed suit in federal district court against mortgage broker Mark Diamond and OSI Financial, a company owned and controlled by Diamond.

Diamond and his company are charged with deceiving borrowers about the terms of their loans. Many of the loans originated by Diamond and OSI were delivered to Mercantile, which actually provided funds.

According to this complaint, Diamond routinely targets homeowners with poor credit who might have difficulty obtaining home equity loans. He is said to particularly solicit low-income individuals, including the elderly and persons who have significant equity in their homes.

He is charged with referring virtually all of his customers to Mercantile over a three-year period in exchange for a fee that sometimes was a high as 10 percent of the loan amount. Mercantile also is alleged to have received illegal kickbacks in return for accepting loans with such excessive charges.

The complaint against Mercantile is the 17th enforcement action brought by the Federal Trade Commission against "subprime" lenders engaged in unlawful practices in the last four years. And FTC Chairman Timothy Muris said his agency "will continue to aggressively pursue" such cases.

The enormous growth of the subprime sector, which serves borrowers with poor or blemished credit who cannot find financing at more reasonable rates and terms, has opened the doors some say floodgates to lenders and brokers who pull the wool over the eyes of unsuspecting or unknowing consumers.

Although the many legitimate subprime lenders expand access to credit to those who otherwise would be shut out of the market, unethical lenders hide the essential information borrowers need to make informed decisions.

"This type of fraud has such a devastating impact on victims because for many people, the equity in their homes has taken a lifetime to build and represents their life savings," said Illinois Attorney General Jim Ryan.

The settlement order, which is subject to court approval, permanently enjoins Mercantile and its officers and employees from misrepresenting the terms, costs and other conditions of any loan to consumers, and from violating several federal statutes governing the mortgage and credit businesses.

Among them are the Real Estate Settlement Procedures Act, which prevents lenders from either giving or receiving kickbacks for the referral of loans, and the Home Ownership and Equity Protection Act, which requires lenders to provide vital information regarding high-cost loans three days before closing.

Meanwhile, the FTC continues to warn borrowers to shop around before signing on the dotted line. "Costs vary greatly," the consumer watchdog agency advises in several free publications designed specifically for home owners and potential home buyers. "Comparing loan plans will help you get a better deal."

Other tips from the FTC include: