There are hundreds, if not thousands, of Californians who can tell stories of how they were bilked by home improvement scams, loans to pay for repairs from natural disasters, and foreclosure "rescue" attempts. Some cases involve outright fraud and misrepresentation. The following case histories,¹ supplied by legal advocates and victims, are representative of the growing number of reported and unreported home equity loan fraud and abuse cases in California. The victims are typical of those targeted by scammers: most are elderly, many are women and many are of African-American or Latino heritage.

Generally, home equity fraud and abuse appears in one of four forms:

• Home improvements service contracts
• Disaster related home loan abuses
• Foreclosure "rescue"
• Bill consolidation/refinancing loans

Home Improvement Scams

A significant percentage of the home equity fraud cases litigated by legal aid advocates concern home improvement projects. These cases often involve elderly or disabled homeowners who are longtime residents of older, inner-city neighborhoods. In the San Francisco Bay Area, several cases have involved solicitations for repairs related to damage caused by the 1989 Loma Prieta earthquake.

Home improvement scams generally start with a friendly door-to-door salesperson offering services such as earthquake repair, interior or exterior remodeling, floor coverings, or siding. Sometimes the services offered include installing unattached property such as satellite dishes. Often, the sellers of these products are not licensed contractors. They use high-pressure sales tactics, and charge very inflated prices. To cover the cost of "repairs," the salesperson conveniently offers to arrange financing. Unfortunately, homeowners frequently are unaware that their homes are collateral for these loans because the salesperson skillfully uses deception or misrepresentation to dupe the unsuspecting homeowner. The salesperson may even arrange to lend against the home's equity for equipment such as satellite dishes, even though state law forbids loans for this product to be secured by a lien against a home.

  Once the contract is signed, the contractor obtains the financing and arranges for his fee to be deducted from the loan proceeds. The Federal Truth in Lending Act requires the lender to provide the borrower with certain disclosures and a three-day right of rescission period.² Although forbidden by the Truth in Lending Act, the contractor frequently begins work before the end of the three-day rescission period. By law, work is not supposed to be performed during this period unless the homeowner signs two waivers: one agreeing that the work is of an "emergency" nature, and another waiving his or her right to rescind the loan.

Homeowners are generally not targeted randomly for high-cost, equity-based financing. Contractors and others seeking to sell high-cost loans usually look for older homes with visible signs of wear and tear, or, as demonstrated in some San Francisco cases, for city/county notices of structural deficiencies caused by earthquake damage. Public records show who owns the property, whether the owner occupies the house, how long the owner has resided there, whether the person owns the house outright or jointly, and what mortgages and encumbrances are on the property. A trip to a county hall of records also shows whether the owner is widowed and, if so, for how long.

Armed with this information, sales representatives have targeted the homeowners they know are likely to need money or to be the easiest target for an expensive loan. These salespeople have even approached the person by name on the initial cold call.

What makes these practices particularly egregious is, regardless of the quality of the home improvement work -- or even whether it is ever completed -- the homeowner remains liable for paying the loan to avoid losing the house to the lender. In many cases, what homeowners received was a far cry from actual home improvement services. Instead, work was left uncompleted or homes were reduced to virtually uninhabitable shells. Some of these victims have been forced from their homes into rental housing because their dwellings were no longer habitable. The monthly rental payments added to the economic burden these victims already faced with paying equity loans for work that was never completed to their satisfaction.

Here are how home improvement scams have affected some Californians:

MS. JONES is a 73-year-old woman who has suffered from several strokes and does not have full control of her mental faculties. In 1992, Ms. Jones' roof was leaking and needed repair. Her son had spoken to various contractors in the Los Angeles area about the roofing work, but had not yet settled on a specific contractor.

One day, a representative of a home improvement contracting company came to Ms. Jones' home and offered to have his company do roofing work for her. Ms. Jones told the representative to speak to her son. At Ms. Jones' house, the representative called the son, and the son inquired whether the representative was from the contracting company with whom the son had previously sought an estimate for the job. The representative said he worked for another company.

Subsequently, the son told Ms. Jones that she should allow the representative to inspect the premises. But before he began, the representative told Ms. Jones that he needed her to sign an authorization form in order to inspect the premises. But what she actually signed was a contract to do remodeling work, as well as a security agreement putting a lien on Ms. Jones' property.

Not knowing what she was entering into, Ms. Jones erroneously signed all the documents presented to her, resulting in a contract for $15,000 and a 10-year loan at 19.5% interest. The following day a crew of workers from the home improvement contracting company began ripping down the old roof and putting up plywood.

Ms. Jones eventually reached a settlement in the case.

JOSEPHINE B. is an 75-year-old widow who owns a home in Oakland. In 1991, she was approached by a salesman for a painting contractor who, according to Mrs. B., told her that it did not matter whether she had any cash to pay for the paint job because he could arrange for a loan to pay for it.

Soon thereafter, Mrs. B. was visited at her home by a loan agent from a finance company. The agent had her sign several documents, which she did not read because of the extensive wording and her limited reading ability and comprehension. According to Mrs. B., the only thing the loan officer asked her was whether she could afford to pay $140 per month. She could, she said, and the loan agent had her write a statement to that effect.

At no time, however, did the loan agent tell Ms. B. that, in addition to the monthly payments, she would be responsible for a balloon payment of $11,200, which would be due in seven years. Several months after the loan was made, Mrs. B. became ill and fell behind in her loan payments. Around Thanksgiving, 1993, Mrs. B.'s grandchildren found her at home with no utilities, no phone and no electricity. She had run out of money to pay for her utilities because she was still trying to pay her mortgage.

Mrs. B. received an injunction against the finance company when the company failed to appear in court. However, the finance company had sold the loan to an investor who had purchased several other of the finance company's notes. The investor continued to assert his right to foreclosure on the property as a holder in due course of the loan note until a settlement was reached. All interest and fees were waived and Mrs. B. is now responsible only for payment of the loan principal.

HERMAN R. is a 68-year-old retired maintenance man who has an eleventh grade education. His wife is 58 years old and is mentally incapacitated. In 1957, Herman R. purchased his home, which over the years has appreciated significantly.

His attorneys reported the following. In late November 1993, Herman R. was approached by a salesman who convinced him to undertake a home improvement project. The home improvement contractor then sent a representative from a loan company to see Herman, who signed what he thought was simply a contract for work to be done. In fact, he had signed a loan agreement.

Soon after the Northridge earthquake, Herman discovered that there were not one, but two, separate deeds of trust placed on his property for twice the amount to which he thought he had eventually agreed. Without Herman's consent, the contractor had upped the price of the project and arranged for a second loan. When Herman complained, the salesman said earthquake safety work -- for an additional fee -- would be required before the lender would consolidate the loans, and if it wasn't done the lender would call the other loans, making them due immediately.

Herman's lawyers eventually discovered that a deed for a third loan -- again made without Herman's permission -- was about to be filed when they stepped in to block it.

In all, Herman had liens totaling $35,000 against his home for shoddy construction work. Following extended settlement negotiations with the finance company, which Herman's lawyers say have a history of abusive loans, the finance company agreed to relieve him of any obligation for the loans.

NORA B. is an 80-year-old widow who had a first mortgage on her home of just $214.00 per month. She has a ninth-grade education and is unsophisticated about financing techniques such as balloon payments.

According to Ms. B., in 1990, she was approached by a home improvement contractor who told her that he could arrange for a loan to pay for new siding and to consolidate the consumer debt of $15,000 left by her deceased husband. She was then visited at her home by a salesperson for a finance company who had her sign the loan application and several other documents. Many of the documents contained blank spaces, she said.

According to Mrs. B., the only thing the salesperson discussed with her about the loan was whether she could afford to pay $300 per month. Mrs. B. said she thought she could.

She said never, however, did the lender explain to her that a mortgage was going to be placed on her home or that a balloon payment of $32,900 would have to be paid in addition to the monthly payments. She also said she never was told the balloon payment was due in September 1995.

The lender arranged to finance the home improvements and make the loan to Mrs. B., apparently without taking into consideration her ability to pay the monthly mortgage payments or final balloon payment. In 1993, she fell behind in the mortgage payments, and the lender began foreclosure proceedings. In desperation, Mrs. B. filed for bankruptcy.

With the help of legal counsel, Mrs. B. was able to receive an injunction against the lender and delayed the foreclosure. However, the investor to whom the lender sold the note continues to assert a right to collect. Recently, the investor obtained relief to begin foreclosure proceedings again, but Nora's lawyers got another preliminary injunction to temporarily delay the proceedings. The case is set for trial in October 1995.

DORIS is 78 years old, has an 11th grade education, and suffers from a heart condition. Her husband in 95 years old, has no formal education and is mentally incompetent. They live on a small, fixed income.

In September 1991, a salesperson tricked Doris into signing a home improvement contract to install a new fuse box and electrical wiring she did not need. Doris was already holding a loan through a traditional lender; the salesperson convinced her to arrange for a larger loan to cover the repairs and to pay off her existing lien. Eventually, a lien for $33,895.20 was placed on Doris' home even though the value of the improvements was only $1,500.

By the time Doris settled her legal action against the lender, approximately seven deeds of trust had been signed on the property and the company had tried to buy the house. The loan was found invalid due to statutory violations by the company, including the failure of the salesman to hold an appropriate license. She now owns the home, free and clear. Punitive damages were assessed against the contractor totaling $175,000, but Doris' attorneys say there is little hope of recovering the award.

Disaster-Related Home Loan Abuses

Many individuals whose homes were damaged by natural disasters, such as the Loma Prieta and Northridge earthquakes, are particularly vulnerable as they seek ways to make their homes -- and lives -- whole again. Many of the homes that were damaged, especially in low-income areas, were not insured for earthquake risks and remained unrepaired long after the quakes hit. Unsuspecting homeowners are easy prey for friendly door-to-door salesmen who suddenly offer the prospect of money for repairs and possibly even some extra money.

The Contractors State License Board has issued several bulletins warning homeowners to work exclusively with reliable, licensed contractors and to look out for "wanna-be's looking to take advantage of people's desire to get their lives back to normal."³ Nevertheless, several homeowners have found equity in their homes threatened or lost due to unscrupulous or unlicensed contractors who arrange home equity financing.

Here are the stories of some victims of overpriced, disaster-related loans:

EVA D.of San Francisco is a 55-year-old widow and 36-year resident of her Potrero Hill home. Ms. D. said she was lured into a loan with a lender after being approached by a contractor and loan officer who offered to repair damage done to her house during the Loma Prieta Earthquake. Mrs. D. could not read or sign the loan documents because she suffers from glaucoma and had broken her eyeglasses before the meeting. Instead, the loan officer had her sign a blank piece of paper.

Her income at the time of the loan was less than $1,200 per month, but the lender arranged for a $150,000 loan, charging $23,000 (over 15 points) in loan origination fees. The loan consolidated her existing mortgage indebtedness of $58,000. The balance was for the repairs to the home which was estimated to cost $70,000.

The loan more than tripled Ms. D.'s monthly loan payments from $619 to just under $2,000 per month. The repairs to her home were never completed by the contractor, whom Ms. D. later discovered was unlicensed.

While Mrs. D. was unrepresented by counsel, an arbitration decision was rendered against her. Mrs. D's home was sold at trustee's sale on April 21, 1993 after unsuccessful attempts by her present attorneys to have the arbitration decision set aside. When Mrs. D. was evicted on February 16, 1994, she was carried out of her home in a wheelchair by paramedics and taken to Mt. Zion hospital.

Since that time, Mrs. D. has been staying with different relatives and has been hospitalized for high blood pressure and diabetes. She has lost her home and continues to search for affordable housing. Her case against the lender is still pending in the courts.

WILNA A. is an 80-year-old woman with a tenth-grade education who has owned her Los Angeles home since 1971. She and her 86-year-old husband live on a small, fixed income. After the Northridge Earthquake, Mrs. A. received a telephone call from a woman who claimed she worked with the Federal Emergency Management Agency (FEMA). She asked Mrs. A. if she needed food stamps to recover the food she lost because of the power outage. She also told Ms. A. that FEMA would send an inspector to Mrs. A.'s home.

The next day, a man claiming to work with FEMA came to Mrs. A's home and convinced her to sign several documents. He told Mrs. A. that the documents were FEMA applications and promised her he would immediately take these applications to FEMA for processing. Instead, the documents turned out to be a home improvement contract with a building contractor and a financing contract through a lender ˜ two companies which often do business with each other and are run by cousins. Work was begun before the end of the three-day right of rescission period required by federal law. Liens were placed on her home for $32,635.68 for exterior paint, roof shingles, and a garage door.

Mrs. A. did eventually receive an injunction and settlement from the two companies, and the home's title was reconveyed to her, the loan was discharged, and she received punitive damages as a result of the settlement.

ADDIE C. of San Francisco is a 43-year-old licensed home health care specialist who runs a board and care facility in her home. She cares for six adults with disabilities ranging from emotional difficulties to cerebral palsy.

In November of 1989, a loan officer from a finance company appeared at Addie C.'s home and asked whether she needed any financing to help complete refurbishing of two flats in her home, which had been damaged by the Loma Prieta earthquake. She agreed, and the loan agent arranged a $33,000 loan (plus loan fees of $4,950, or 15 points).

After the initial reconstruction project was completed, she was able to obtain added income by increasing the number of adults she cared for. The loan officer suggested a debt consolidation loan that would pay off her first mortgage and the smaller previous loan the finance company had already given her. She agreed again, and they met at a K-Mart store in Redwood City to sign the papers. Upon receiving the documents, however, she noted that some of the pages were blank and that the note she signed did not include the loan amount. Her income was not verified before the loan was approved and she never saw completed loan documents until after the loan was consummated.

When she did finally see the completed documents, she learned she was carrying a loan of $286,500 (including loan fees totaling $42,975). Ms. C. immediately fell behind because the payments of over $3,300 per month exceeded her income level.

As a result of these loans, Ms. C.'s home was sold in foreclosure on February 24, 1993. (Ironically, shortly after she defaulted on this loan she received a letter from a "consultant" at the lender's subsidiary, stating that the company had "over $800,000 allocated to assist the residents of San Francisco out of foreclosure and on to a strong financial path.") After eviction proceedings were completed, Ms. C. was forced to relocate herself and her board and care patients to a new location. She reports she had great difficulty locating another affordable residence large enough to continue providing board and care to her clients, and many of them suffered trauma and disorientation as a result of the move. Her case against the lender is still pending.

Foreclosure "Rescue"

Another form of home equity abuse inflicted on homeowners is so-called foreclosure "rescue." Homeowners who fall behind in their mortgage payments may have notices of default entered against them by the lender. These notices mark the beginning of the foreclosure process and are a matter of public record in the County Recorder's offices. Lenders combing the files at the recorder's office use default notices to target people for "foreclosure rescue" services, often in the form of a "refinance" loan. Although the loans are presented to consumers as a "bailout," the truth is they generally postpone the inevitable loss of the home while draining most or all of the homeowner's remaining equity. Frequently, homeowners who must resort to this type of emergency, last-ditch financing would be better off selling the home earlier than accepting a short-term "rescue" at such a high cost.

Typically, homeowners in default are bombarded with unsolicited visits, phone calls and mailings (such as the one Addie C. received from a company affiliated with the lender) from so-called "foreclosure rescuers." For example, one Bay Area borrower in foreclosure saved more than 50 letters she received over a three-year period from consumer finance lenders, attorneys, real estate licensees, private investors, real estate appraisers, developers and others.

The overwhelming message of these sales pitches is "help is on the way even if the situation seems hopeless." These lenders claim to offer credit without a verifiable source of income as long as there is equity in the borrower's home. Often, a "rescuer" will persuade an unsuspecting homeowner to deed the property to him by making lofty promises. In exchange for the deed to the property, the "rescuer" promises to make all mortgage payments, help the homeowner restore his credit, and allow the homeowner a lifelong right to stay in the home as a renter.

Recognizing that homeowners whose residences are in foreclosure are particularly vulnerable to illegal and unfair practices, the California Legislature in 1979 enacted Civil Code section 2945 et seq. to protect the public in foreclosure consulting transactions. In addition to requiring written foreclosure consulting service agreements, the statute also permits the homeowner to rescind the contract, prohibits misleading representations, and encourages fair dealing. Unfortunately, this statute has not eliminated foreclosure consultant abuses because it exempts eight classes of potential consultants from the statutory definition of "foreclosure consultant" subject to statute's prohibitions. The exempted groups include two of the most common types of foreclosure rescuers, consumer finance lenders, and real estate licensees (making a direct loan to a homeowner from the licensee's own funds).

The promises foreclosure rescuers use to lure homeowners are rarely honored. For example, a so-called rescuer may take title to the house and agree to make the payments, then collect rent from the homeowner but fail to make the mortgage payments. In Los Angeles, for example, the FBI and U.S. Attorney's Office are investigating a man named Bernard Gross (he changed his name to David Love Paris in 1993, but uses his old name). The Los Angeles Times reported that papers had been filed in court alleging that Gross defrauded homeowners and mortgage holders of financially distressed properties by falsely promising to prevent foreclosure though similar white knight techniques.⁴

Gross, who maintains his innocence, allegedly "failed to make payments or otherwise negotiate with the mortgage holder" after obtaining title, according to a federal court affidavit. One couple said they paid Gross about $9,900 in rent ˜ only to later lose their home anyway. They said they had no idea payments were not being made until a notice was mailed to their home that the house was identified as an asset in another's bankruptcy proceedings.

According to the Los Angeles Times report and the Los Angeles County Department of Consumer Affairs, Gross kept the original mortgage holders from obtaining transferred properties by dividing ownership into shares, and then deeding them to other individuals or businesses who had just filed, or were about to file, for bankruptcy. Records obtained by the Times showed a handyman for one of Gross' firms had received an interest in nearly 300 properties. As a result, the mortgage holders had to travel a seemingly endless trail of bankruptcy hearings before they could take title to a property.

Other Examples of Foreclosure Rescue Cases:

GENEVA B. of San Francisco is 58 years old. In 1989, due to illness, Ms. B. fell behind in payments with a major bank. In January of 1990, the bank started foreclosure proceedings and notified her that she needed to pay $3,478.37 to cure the default. Ms. B. received a mailing from a mortgage company saying they could give her a loan to get her out of foreclosure.

Ms. B. called the mortgage company and told the loan officer she needed about $7,000 to cure the default and pay utility liens. According to Ms. B., she was persuaded to take out a larger loan and sign a note and deed of trust that were blank; only after the loan was approved and she received all the documents did she discover that the full amount of the loan was $77,000 and that she was paying $12,320 (16 points) in loan origination fees.

In addition, the mortgage company held onto $43,000 to cover 30 months of payments to the company and two years of payments on the bank loan. Ms. B. had arranged to receive $15,490 in cash from the mortgage company loan to improve her home, but it took 16 months and the help of an attorney before she received $13,565.

Ms. B. also learned after her loan was approved that it contained a "call" provision, which would allow the mortgage company to demand payment in full if she was just one day late with her payment during the first 36 months. As she struggles to make the payments, Ms. B.'s attorneys have succeeded in obtaining an injunction against the sale of her home, allowing her to stay in her home of 15 years. Nevertheless, she is still threatened with the loss of her home if she cannot keep current on the loan.

FRED W. is a 79-year-old Berkeley resident who has owned his home since 1964. After his wife's death, Mr. W. suffered a series of strokes and deteriorated mentally and physically. His son contacted an East Bay legal services agency after Mr. W. received letters from a mortgage servicing company for another lender, threatening him with foreclosure. Mr. W. had fallen behind on two monthly payments of $982.87, not surprising since his total monthly income consisted of a Supplemental Security Income check for $602.40.

According to his attorneys, closer examination through the recorder's office revealed that six loans had been taken out on the property from April, 1992 to December of 1993. (Mr. W. did not have any documents.) During that time a loan broker had appeared at Mr. W.'s home and befriended this disabled minister of questionable capacity, then proceeded to arrange a succession of small to larger loans that presently total more than $100,000.

Mr. W.'s attorneys are attempting to piece together which loans were used to pay off a former $30,000 loan and how much money Mr. W. actually saw (about $500, according to Mr. W.). This case is currently under investigation by his attorneys who will continue to examine each of the loan disclosure statements for excessive fees and to determine if Mr. W.'s brother's income was used by the lender to pad Mr. W.'s monthly income. No resolution has been reached in the matter.

RACHAEL X. is an elderly disabled woman who lives on a fixed income. She has lived in her Los Angeles home since 1975 and presently is the guardian of five grandchildren. According to Ms. X.'s attorney, she was in default on a $10,000 loan in June, 1993 when she was approached by a man who said he represented a wealthy investor who wanted to give something back to his community by helping people in foreclosure. Ms. X. said the man made many promises and had Ms. X. sign a typewritten contract that he said would "help save the home and keep the grandchildren from being homeless."

In August of 1993, Ms. X. said she received a notice of foreclosure from a bank she had never heard of. She investigated and discovered that someone else owned her home, and the person had taken out an $80,000 loan and defaulted. She found a deed with her signature forged on it -- certified by a notary public who also certified the trust deed for $80,000.

Ms. X filed a notice of rescission and eventually reached a settlement against the mortgage company which had sold the loan on the secondary market to investors.

BETTY M. of San Francisco fell behind in the mortgage payments on her first trust deed in 1989 as a result of a disabling illness. After receiving a mailing from a mortgage company, a loan officer came to her house. Ms. M. informed the loan officer that she could not afford a loan with payments of more than $200 per month, and he assured her that he could arrange a loan meeting that requirement.

During the meeting at her home, Ms. M. was asked to sign numerous documents, including a promissory note and deed of trust -- both of which were blank. When Ms. M. asked why the documents were blank, the loan officer said that it was their practice to fill out the documents back at the office and then provide them to their borrowers. Two weeks later, Ms. M. received a copy of the completed promissory note and discovered that she had been placed into a loan that required monthly payments of $695.44. She also learned for the first time that she was being charged $8,800 (or 16 points) in loan origination fees. This $8,800 in fees was for a loan with proceeds of only $46,200. Ms. M. lost her home of 25 years in 1991 through foreclosure to the lender, and she now resides in a rented San Francisco apartment.

Refinances and Debt Consolidation

Home equity loans are often promoted as a way to consolidate debts or refinance an existing loan. Lenders may claim that a home equity loan will reduce monthly payments on credit cards and other debts through lower interest rates and tax deductions. The primary targets for lenders selling debt consolidation loans are homeowners with poor credit and an immediate need for funds, but who would have trouble qualifying for a loan from a mainstream lender. Therefore, the potential victim may be willing to accept a higher-than-average interest rate.

In reality, however, what appears to be a needed source of funds may often result in a higher debt -- driven by high interest rates and fees -- with impossible balloon payments, all secured⁵ by the home. The result may be foreclosure, even if the loan consolidated unsecured debts (such as credit card debt) that would not have resulted in loss of the home if they had remained unconsolidated.

Debt consolidation, as the following case histories show, can be a step in a cycle of unnecessary, unscrupulous or unwise loans that place the borrower in a hopeless financial situation. Unprincipled lenders see it as a way to offer a false ray of hope that is, in reality, simply an avenue toward acquiring the home at a low price. The homeowner is put on a treadmill of increasingly expensive loans followed by foreclosure when the loans have drained all the equity from the home.

ELLIE M. of Oakland is 67 years old and has owned her home since 1961. By June 1994, the principal balance due on her mortgage was down to approximately $19,000. After more than 30 years of mortgage payments, Ms. M. made one payment one day late, which prompted the lender to send her a letter threatening to foreclose. Not surprisingly, the letter greatly upset Ms. M.

As Ms. M. (or Ms. M.'s attorneys) reported, while Ms. M. was bedridden for two weeks following an automobile accident in which her car was destroyed, a loan officer from a mortgage company began making unsolicited phone calls urging Ms. M. to refinance her mortgage. Ms. M. repeatedly told the loan officer she was too ill to consider a refinance at that time, but finally consented to a personal visit. When the loan agent arrived, Ms. M. got up from her bed and sat at her kitchen table in her housecoat. The loan agent assured Ms. M. that he would obtain for her an 8.55% fixed rate refinance loan. She signed the loan documents he had brought with him and returned to her sickbed.

A week later, Ms. M. was well enough to read her copies of the papers she had signed, and discovered she had signed a variable rate note providing for a semi-annual adjustment and a maximum rate of 15.55% interest. She was also being charged $6,648.00 (23 points) as a loan fee.

Attorneys for an East Bay legal aid group assisted Ms. M. and persuaded the lender to reconsider the loan. Ms. M. has since refinanced with a loan from a different lender at a significantly lower rate.

JAMES D. is 95 years old, has no formal education, and is mentally incompetent. His wife, Doris, is 82, and they live on a small, fixed income in the Los Angeles area.

In March 1991, a loan broker arranged with a lender to refinance James' credit card debt and several home improvement contracts (once again on work by a contractor who often does business with the lender). The loan broker put them into a loan for $30,000, even though their total debt was only $15,000. The loan broker kept $15,000 of the proceeds as broker fees.

By the time loans were made and refinanced, liens totaled about $92,000 --almost all due to work on a single bathroom. James and Doris were unable to make payments, and foreclosure proceedings were begun.

After seeking legal aid, James and Doris were granted a permanent injunction against the foreclosure. In addition, the loans were rescinded and damages were awarded.

MS. SMITH is an 81-year-old woman who bought her house with her husband in Los Angeles in 1937. The Smiths paid off the house in 1950, raised their children in the home and were upstanding members of the community.

In May, 1990, Mr. and Ms. Smith contacted a loan broker for a loan to consolidate four loans (which they had obtained since paying off their house) into one and to secure a smaller monthly payment. At the time, the Smiths had debts totaling approximately $70,000. Their monthly income consisted of approximately $1,000 per month in Social Security payments.

Instead, the loan broker arranged a loan for $88,150 and pocketed $11,900 in commissions. The terms were interest only (no payments applied to the principal), at $1,128.32 per month payment for 35 monthly payments, culminating in one balloon payment of $86,450.17. Although the loan broker gave the Smiths the impression that all four loans would be consolidated, only two were actually refinanced. The two loans that were paid off were fully amortized loans with a payoff balance of $70,000. The Smiths paid $1,030.73 per month for these two loans.

In essence, the Smiths gave up two amortized loans (which steadily decreased the balance owed) for one interest-only, balloon-payment loan with higher monthly payments. In brokering the loan, the loan broker listed the Smiths' income as $1,770.00 per month as of May, 1990. However, approximately $450 of this income was listed as coming from "odd jobs," clearly not the type of income the Smiths could rely on, especially considering their age. By the time the loan broker had finished, the Smiths owed $1,644.24 per month -- an amount they could never afford. In addition, an $86,450.17 balloon payment loomed after just three years.

During the foreclosure period, the broker promised to redo the loan several times at more favorable terms, but canceled every meeting with the Smiths just before they were to sign papers for the new loan. These evasive tactics effectively kept the Smiths from seeking other means of refinancing or selling the property, and kept them in foreclosure.

In September of 1992, Mr. Smith committed suicide at the age of 83. At that point, the Smiths were in foreclosure for their home, and according to Ms. Smith, the threat of losing the home they had lived in all their adult lives was overwhelming. Ms. Smith is convinced that the realization that the balloon payment was due in a few months, which threatened to render the Smiths homeless, significantly contributed to her husband's depression, and ultimately, his death.

Since the death of her husband, Ms. Smith's sole income is $324.00 per month from Social Security. According to the Smiths' attorneys, there was absolutely no logical reason for anyone to place the Smiths into loans that were far worse than their pre-existing obligations, and they have no doubt the Smiths were taken advantage of.

Ms. Smith fell behind on the loan, the balloon payment was due, and the loan broker representing the private investors began foreclosing on the property. Fortunately, pressure from her attorney ultimately enabled Ms. Smith to reach a confidential settlement with the loan broker which is favorable for Ms. Smith and allows her to keep the home after much personal tragedy.

Fraud and Misrepresentation

Many of the case histories in each of the four categories of home equity loan abuse include elements of misrepresentation, and some include outright fraud. Here is another example of the harm to consumers from such practices.

EVALYN F. of San Jose is a 73-year-old widow whose sole income since 1982 has been Social Security benefits and a small amount of interest income. She reported that in an effort to obtain a reverse equity loan on her home of 27 years, she contacted a loan broker.⁶ The loan broker called in a loan agent from a mortgage company. Ms. F. was expecting a reverse equity loan that would pay her loan payments, property taxes and insurance, certain home repairs and provide a monthly income of $1,500 for life.

Instead, even though she was seeking a reverse mortgage and her monthly gross income at that time was only $600, the broker and the loan agent put her into a straight home equity loan requiring monthly loan payments of $2,405.37. During that meeting, which Ms. F. said lasted no more than 45 minutes, the broker and loan officer flipped through the loan documents. They pointed to where she should sign and place her initials, but did not explain any of the specifics of the documents. It was not until several months later that Ms. F. realized what had happened.

Ms. F.'s attorneys obtained a copy of the loan application prepared by the lender in which it was apparent the drafter had inflated her monthly gross income to more than $4,000 per month. On October 1, 1992, the lender initiated foreclosure proceedings against Ms. F.'s home. Her attorneys have succeeded in obtaining a preliminary injunction against the sale of the property on the ground that fraud was involved.

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