Five months ago, Ameriquest Mortgage Co., the nation's largest lender to people with bad credit, announced in a securities filing that it had set aside $325 million to settle allegations that it had misled, overcharged and defrauded home-loan borrowers in more than 30 states.

The announcement came on the day the Bush administration announced that billionaire Roland E. Arnall, Ameriquest's founder and principal shareholder and the largest campaign contributor to Bush since 2002, would be nominated to be U.S. ambassador to the Netherlands.

The settlement was never reached, and homeowners have not received compensation for their losses.

Arnall's nomination has been tied up in a dispute on the Senate Foreign Relations Committee as state attorneys general negotiate with Ameriquest for more than just money. They demand that the company make significant changes in how it does business. They want the politically influential firm, which makes high-interest loans primarily to lower-income people, to agree to halt allegedly deceptive sales techniques that have resulted in some buyers losing their homes to foreclosure.

"The issues have been about full and fair disclosure, transparency, and basic fair dealing, which are all required by our laws," said Richard Blumenthal, the attorney general in Connecticut, where he said hundreds of people have said they were misled and financially injured by the company.

"Ameriquest has it within its power to resolve all the issues if it is willing to commit to change its business practices and deal fairly with its customers," Blumenthal said. "If there are political consequences to these issues, the company can help resolve them, too."

Tom Dresslar, a spokesman for California Attorney General Bill Lockyer, said the task force is seeking primarily what he called reforms of business practices at Ameriquest, including "practices regarding appraisals, disclosures regarding prepayment penalties and other matters."

"In terms of changing the way they do business, it will be broad in scope," Dresslar said. California law-enforcement officials discovered the problems while investigating 75 to 100 consumer complaints they received from 2001 to 2003, he said. During that investigation, he said, "the extent and egregiousness of the business practices became clear."

The task force has never specified the allegations made against Ameriquest in 33 states, including Maryland, and the District. The most complete list of the complaints under review was contained in written material Arnall himself provided to the Foreign Relations Committee. That material, reported by the Los Angeles Times and confirmed by committee staffers, includes allegations that Ameriquest:

* Pressured appraisers to inflate property values so borrowers could get bigger loans.

* Charged upfront fees without reducing interest rates as promised.

* Told borrowers to ignore written information about interest rates because they would give them lower rates later and actually gave them the higher rates instead.

* Assured borrowers their loans would have no prepayment penalties, then inserted them into the final loan.

* Refused to lend on Indian reservations because of laws preventing foreclosures.

* Delayed the time period between the loan closing and the funding.

* Misrepresented fees and costs.

In testimony before the Senate Foreign Relations Committee last month, Arnall said that Ameriquest had not handled its dealings with customers "perfectly" and that some employees who had behaved badly have been fired.

"Mistakes have been made," Arnall said. "When mistakes are made, we take care of the problems. We fix the problems."

But for many consumers, the problems have not been fixed because the settlement that would compensate them for their losses has not been finalized. Several sources close to the discussions said recently a settlement might be announced soon. The amount of the settlement -- $325 million -- is no longer in dispute; the major stumbling block has been negotiations over what Ameriquest must do to change its business behavior and how those changes could be externally monitored.

A settlement would probably clear the way for Arnall's confirmation as ambassador to the Netherlands, a post he greatly covets, according to some people involved in the negotiations.

To facilitate his confirmation, Arnall has agreed to step down from control of the company that is the primary source of his vast wealth. In October, he left his position as co-chairman of Ameriquest's holding company, Ameriquest Capital Corp., leaving control of the company solely in the hands of his former co-chairman, his wife, Dawn. He has told the Foreign Relations Committee that if he were confirmed as ambassador, his wife would accompany him to the Netherlands and share his duties representing the United States.

Ameriquest officials said an executive management team is meeting with the state attorneys general to resolve the remaining issues in dispute. "The discussions are ongoing," said Chris Orlando, an Ameriquest spokesman. "From the company's standpoint, we are working hard with the attorneys general to reach a well-thought-out, comprehensive agreement that's good for consumers and fair to the company."

The Ameriquest investigation coincides with increasing criticism of what is called "subprime" lending -- high-cost loans made to people with poor credit histories, unreliable sources of income or low down payments. A decade ago, only 5 percent of home mortgages were subprime. But as housing prices rose and the average consumer's credit-card debt increased, even many middle-class buyers found it hard to qualify for conventional mortgages at low interest rates. By last year, 19 percent of home loans were subprime.

Those loans have made homeownership possible for more people, but in many cases, prosecutors say, unsophisticated buyers have been lured into buying homes they were barely able to afford, and were misled about how much the interest and fees would cost them. Many of the purchasers obtained adjustable-rate loans, which would raise their costs if interest rates rise in the future. Buyers who fall behind in their payments generally lose their homes to foreclosure, with the lender taking ownership of the property.

Ameriquest, a California-based company founded by Arnall in the 1970s, is the largest single provider of such subprime loans.

The Foreign Relations Committee deadlocked 9 to 9 on Arnall's nomination last month after several senators expressed concern about the unresolved litigation with the states. But committee Chairman Richard G. Lugar (R-Ind.) said the proxy votes of absent members should not count, declared the vote was really 8 to 2 in Arnall's favor and moved the nomination to the Senate floor. Senate Democrats have said they will challenge the move if Majority Leader Bill Frist (R-Tenn.) brings the nomination up for a vote.

Sen. Lincoln D. Chafee (R-R.I.) voted to confirm Arnall, even though Rhode Island is one of the states participating in the task force investigating Ameriquest. Michael J. Healey, a spokesman for state Attorney General Patrick C. Lynch, said Rhode Island was participating in the inquiry because of a sharp increase in predatory lending in that state. But a spokesman for Chafee said the senator voted for Arnall because the California businessman is not an "officer or chief executive officer" of Ameriquest, was not individually charged with wrongdoing, and should not be blamed for what might have happened at the company.

"He was not under investigation personally so to hold up his nomination would be improper," said Stephen Hourahan, Chafee's press secretary.

Similarly, Sen. Norm Coleman (R-Minn.) also voted for Arnall despite his home state's extensive investigation into Ameriquest's alleged predatory lending practices in that state. In a statement, Coleman praised Arnall as a philanthropist and said he would be a worthy candidate for ambassador.

"Mr. Arnall is not the subject of any investigation," Coleman said. "His personal actions have never been called into question. His credibility and integrity were praised by members from both sides of the aisle during his hearings. For these reasons, it is inappropriate to hold up Mr. Arnall's nomination."

Arnall has been a major financial contributor to the political funds of both Republicans and Democrats, and at the Foreign Relations Committee hearing, he was warmly greeted by senators from both parties. Rep. Tom Lantos (D-Calif.) endorsed Arnall's nomination, praising him as a philanthropist and a Holocaust survivor. Ameriquest is Lantos's largest political contributor. And after the hearing, U.S. Sen. Christopher Dodd, who voted against Arnall's nomination, conceded in a report published in the Los Angeles Times that he found it a difficult vote to cast because Arnall had recently hosted a fundraiser for him.

It was a party-line vote except for Sen. Chuck Hagel (R-Neb.), who voted against Arnall.

"I do think it's important who represents this country abroad," Hagel said in a statement in November. "I do think we should send people who are not under a cloud of investigation. Mr. Arnall -- fairly or unfairly -- finds himself in that position. I need more answers before I can move forward."

Roland E. Arnall, Ameriquest's founder, is nominated to be U.S. ambassador to the Netherlands.