The latest salvo in the war against home equity fraud is a new report aimed at getting consumers to wise up about so-called "no-equity" or "125% loans" and home equity-secured credit cards.

"The Hard Sell: Combating Home Lending Fraud in California," by Consumers Union, details predatory mortgage practices designed to ultimately appropriate consumers' most prized possession -- their home.

With gimmicky easy-money come-ons laced with hidden costs, some equity loans are outright fraud, others are technically legal, but carry high-costs and poorly disclosed terms. The loans are offered to stave off foreclosures, to consolidate bills, to pay for home improvements and to rebuild after a disaster, regardless of borrowers' ability to repay.

The victims are often minorities or older, perhaps less-educated or financially strapped homeowners who are more vulnerable to the ploys. Lenders in question are so-called "sub-prime" lenders who write loans for equity-rich homeowners with spotty credit and employment records.

The money peddlers are after large slices of the nation's growing home equity pie, especially in California where home owners have recently enjoyed fast home value appreciation fueled by a booming high-tech, job-churning economy.

"In California, we have successful fraud-busting programs that no other state in the country has, but many of these programs are limited to a few metropolitan areas," says Norma Garcia, a Consumers Union-West attorney and author of the 56-page Hard Sell.

But the problem is bigger than California. During the last two years, 4.2 million households converted $26 billion in credit card debt into home equity mortgage debt, according to Brittain Associates, Inc., an Atlanta-based market research firm.

"There are no limits on the interest rates they can charge, there are no limits on points and fees and there are no limits on the type of advertised claims they can make,'' said Garcia.

Along with the unique educational programs in California, the report discusses legislation and litigation designed to combat the predatory lending practices.

The U.S. Department of Housing and Urban Development and the Federal Reserve Board, for example, recently proposed legislation to stop lenders "bait and switch'' tactics charging settlement costs as much as $1,000 more than originally estimated.

The proposed legislation also says lenders should make financing cost information available sooner in the underwriting process, give more notice before foreclosing on a home and limit balloon mortgages.

The federal agencies submitted the proposed legislation to the Senate Committee on Banking, Housing and Urban Affairs following an earlier Federal Trade Commission and U.S. Justice Department probe of predatory mortgage lending practices.

Until stiffer laws are passed, however, it's up to consumers not to fall prey to mortgage rip-offs, Garcia's report advises.

How not to get taken

• Before you start looking for an equity loan, get free, independent loan counseling from your city or county's housing department, community or social group, credit counseling service or recognized consumer advocacy agency.
• Avoid door-to-door and direct mail pitches for home equity loans. Shop at brokers and lenders for a loan suited for your particular financial needs.
• Come-ons that begin, "Jobless? Bad credit? No problem!" are red flags. If it sounds too good to be true, it probably is.
• Don't buy interest-only, non- or partially-amortizing loans. Large ``balloon payments'' are due at the end of such contracts, even after years of payments.
• Never allow yourself to be pressured into signing a contract. Read every word. Don't sign a contract that contains blank spaces.

Consumer resources

• "Hard Sell" and related information is available on Consumers Union's Web site at http://www. consunion.org, or by calling:
  (415) 431-6747.
• The American Association of Retired Persons' Home Equity Information Center is available on the Internet at http://www.aarp.org/hecc/home.html. Contact the association via e-mail at memberapp@aarp.org or call (202) 434-2277 for printed educational materials.
• U.S. Department of Housing and Urban Development offers consumer information and complaint services for victims of predatory mortgage practices at http://www.hud.gov/consum.html, or call (800) 569-4287.

Published: August 13, 1998

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