Seven mortgage lenders that extend credit to high-risk borrowers have agreed to settle Federal Trade Commission charges they violated a law passed by Congress in 1995 to protect unsuspecting consumers when they put up their homes as collateral for loans.

Six of the companies have agreed to pay restitution in the amount of $572,500. Furthermore, two firms must obtain performance bonds before they offer credit in the future. The seventh has gone out of business, but it is banned from any future involvement with high-cost loans secured by a borrower's home.

The agreements are part of the FTC's "Operation Home Inequity," a law enforcement and consumer education campaign that seeks to curb abusive practices in the so-called "subprime" sector of the home equity lending business. And the consumer watchdog agency has promised there will be more.

"These practices are among the most abusive forms of consumer exploitation that I have seen," said FTC Chairman Robert Pitofsky. "Predatory home equity lenders target the most vulnerable home owners -- the elderly and people in financial or personal crisis. These subprime lenders appear to care little about a borrower's ability to pay so long as he has enough home equity to secure the loan."

Lenders like the seven involved in the settlement are able to prey on owners because mortgages are often complicated and difficult to understand, prompting Pitofsky to warn anyone who may be thinking about dipping into their equity or refinancing their current mortgages to proceed with caution. "Don't let anyone talk you into using your home to borrow money you don't need," he said.

The FTC chairman also advised potential borrowers to shop around because costs can vary greatly, and never to sign any documents they don't understand. "Call a lawyer, visit legal aid or talk to someone you trust," he counseled.

Subprime lending has grown dramatically in recent years as lenders look for greener pastures where competition isn't as great. During 1998 alone, lenders wrote an estimated $150 of such mortgages. While most lenders are reputable, some aren't, often persuading borrowers to refinance over and over again so they can collect additional fees or perhaps even take away their homes.

The Home Ownership and Equity Protection Act was supposed to put a stop to such practices. High-cost loans secured by a home are covered by HOEPA, a part of the Truth in Lending Act which requires lenders to make certain disclosures in writing at least three business days before a loan is closed. Consumers must be told they could lose their homes and the money they have in them, the annual percentage rate they are being charged, and the amount of the payments.

The law also bans balloon payments on high-rate, high-feet loans that are due in less than five years and prohibits increasing the rate at default.

The complaints against the seven firms -- Barry Cooper Properties of Encino, Calif.; Capital Mortgage Corp., Provo, Utah; CLS Financial Services, Lynwood, Wash., Granite Mortgage, Lexington, Ky.; Interstate Resource Corp, Newburgh, N.Y.; LAP Financial Services, Louisville, Ky., and Wasatch Credit Corp., Salt Lake City -- alleged serious violations of HOEPA.

As is normal in such cases, stipulated judgements were filed in the appropriate U.S. District Courts. The judgements are for settlement purposed only and do not contain an admission of guilt. But they have the force of law when signed by a judge, and the FTC expects to send refunds averaging about $2,100 to the 275 borrowers who were hood-winked in one way or another.

The amounts to be paid by the six firms range from $25,000 to $250,000.

Published: August 16, 1999

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