Government Turns Eye to Lender Fraud : Borrowing: Lawsuits are being filed against finance companies that allegedly target home equity of poor and elderly.

NEW YORK — Wrenching tales of unscrupulous finance companies taking advantage of minority farm workers in Arizona or elderly homeowners in Georgia have generated fresh scrutiny of the little-watched industry.

As the government begins its own investigations, multimillion-dollar lawsuits are being filed nationwide on behalf of borrowers. And juries are handing down severe punishment to some of the lenders.

The companies themselves admit there may be a few unscrupulous characters within their ranks, but defend the industry as a whole for lending money to those typically shunned by banks--primarily the poor and elderly.

“I can tell you anecdotally where the banks, where the regulated depository lenders are not lending, which is the black neighborhoods, because of redlining. . . . That is exactly where the predatory lenders are focusing their efforts,” said William Brennan Jr., an attorney with the Atlanta Legal Aid Society.

These instances of so-called home-equity fraud will be the subject of Senate Banking Committee hearings set to begin Feb. 17.

The allegations are particularly alarming since home-equity loans are among the most widespread forms of consumer credit in the country, with $271 billion in loans outstanding at midyear 1992, according to SMR Research Corp. of Budd Lake, N. J., which tracks consumer lending.

Industry officials concede that the home-equity market has its share of sleazy operators, like any business, they say.

“I think there are individual lenders in the country which, from time to time, become greedy,” said Joseph Lefkoff, general counsel for the National Second Mortgage Assn., an industry trade group.

“With the size of the second-mortgage market in America, which is enormous, there are obviously isolated cases,” he said. “But I don’t think it’s a pattern. It is not an industry practice to loan money in order to steal equity.”

Finance companies began growing in prominence during the 1980s after the Reagan Administration deregulated financial services. By 1991, the finance companies controlled a third of all business loans in the country, or about $309.7 billion.

Although finance companies must comply with federal consumer-lending laws, they’re generally regulated at the state level. Commercial banks, by contrast, face a blur of overlapping federal and state regulations that restrict their expansion nationwide.

Home-equity loans grew in popularity after 1986 when Congress changed the federal tax law to eliminate the deduction of interest on nearly all consumer loans, except most home-equity loans. SMR Research estimates that outstanding home-equity loans totaled $279 billion in 1992, up from $34 billion in 1980.

Home-equity loans from reputable finance companies in today’s market generally have annual interest rates ranging from 10% to 12%, compared with about 8% for conventional first mortgages.