A national consumer group has criticized the State of Virginia for not moving to protect Virginia borrowers allegedly defrauded by Landbank Equity Corp., a bankrupt second-mortgage company in Norfolk now the target of a federal fraud investigation.

Landbank, which operated in five states for several years and claimed at one time to be the largest second-mortgage company on the East Coast, allegedly charged exorbitantly high discount points for second mortgages made to people desperate for extra cash, many of whom were illiterate, poor, elderly or unemployed.

To finance the operation, Landbank then turned around and sold the second mortgages in groups to other lenders, which were attracted to the loans because of their high yields.

The collapse of Landbank last summer, however, set borrowers and investors against each other, and caught the state in the cross fire. Borrowers, many of whom cannot afford the expense of the second mortgages, are trying to protect their homes from foreclosure and have asked the state for protection, while investors are trying to get their money back -- by taking the houses if necessary.

Virginia Attorney General Mary Sue Terry worked out a settlement between the consumers and investors last month, but the National Consumer Law Center attacked that settlement last week, saying that the agreement helps only the investors.

"We don't like the terms of the settlement because it gives very little relief to consumers who were defrauded -- many out of their homes -- by the Landbank scheme," said Ian DeWaal, staff attorney for the law center. "Instead, it allows the investors who bought Landbank loans -- and thereby made the scheme work -- to escape with only minor damages."

Lawyers representing some of the 5,300 Virginians who borrowed money from Landbank also criticized the settlement, saying that the state had "surrendered" to pressure from out-of-state investors. The borrowers had asked the state to void the loans on the grounds that Landbank allegedly defrauded customers in its lending practices.

In one typical Landbank loan, William A. Joyner, a 79-year-old Hampton man, turned to the company for help with family medical bills after he saw its advertisement as a lender of last resort. Joyner, a school-crossing guard living on $561 a month in Social Security benefits and income from his part-time job, already had been turned down by 15 lenders in his search for a home equity loan.

Despite this record, Landbank agreed to give him a $950 first mortgage and a $24,950 second mortgage on his house. But the cost was high -- 24 percent interest on the first mortgage, 23 percent interest on the second. In addition, Landbank charged Joyner $583 in fees and discount points on the first mortgage and kept $7,148 of the second loan for similar charges.

Joyner, as well as his son and daughter who cosigned the loans, said they did not understand what discount points were or why the truth-in-lending papers showed an interest rate higher than that allegedly quoted by Landbank officials.

Joyner has sued Landbank for fraud and misrepresentation. Landbank has not repsonded to the lawsuit, but a lawyer for Landbank's president said there was nothing improper about the loans.

According to a spokesman for Terry, borrowers, under the settlement, would not be released from their obligations to pay their loans but would get some money rebated.

The spokesman said that all 35 of the companies that bought Landbank loans made with Virginia borrowers had agreed to give back to the borrowers 40 percent of the discount points they paid on their Landbank loans as a rebate, which would be deducted gradually from their loan payments. Borrowers also would get a $100 payment up front to compensate them for excessive origination fees charged by Landbank.

In addition, borrowers who are delinquent on their loan payments would be allowed to start payments again with no penalties.

"The settlement is probably not the best for everybody, but it provides the most relief possible for the most people as quickly as possible," said Bert L. Rohrer, spokesman for the attorney general. "This gives the borrowers a chance to come up to date on their payments and eases the chances that they will lose their homes through foreclosure." The total settlement, Rohrer said, would cost the investors an estimated $10 million, an average of $1,900 per borrower.

Bruce Murphey, a Virginia Beach attorney representing Joyner and several other Landbank borrowers, said, however, that the newspapers in the Virginia Beach area are "filled with foreclosures on Landbank loans every week," and that he believes many of the borrowers ultimately will lose their homes despite the settlement.

Murphey and consumer advocates in Virginia also have criticized the state for not moving more quickly to protect Virginia borrowers, as the State of South Carolina did when it filed suit against Landbank last fall.

Landbank, which had several offices in South Carolina, made more than 1,000 second mortgages to South Carolina borrowers and in some cases charged interest rates of 40 percent for the loans.

South Carolina, which has a stronger consumer protection law than Virginia, began investigating Landbank as soon as it found out about the high interest rates, and later filed suit against the company and several of the lenders that had bought Landbank's loans, alleging that the company operated an "illegal and fraudulent interstate lending scheme which has had the effect of injuring the borrowing public of South Carolina."

First Federal Savings and Loan of South Carolina of Greenville, which purchased a total of about $20 million in loans from Landbank, agreed last week to rebates averaging $2,900 for nearly 130 Landbank customers in South Carolina.

The bank will rebate 70 percent of the discount points charged by Landbank in the form of reduced payments over the next 42 months and will allow borrowers delinquent on their payments to start payments again with no penalities.

In exchange for the rebates, the state consumer affairs office agreed to release First Federal S&L of South Carolina from the pending lawsuit. Although the savings and loan has a large portfolio of Landbank loans, the settlement with the state involves rebates ononly $1.6 million worth of loans, which represents those that were given to South Carolina borrowers. The S&L has not offered similar rebates for loans given to borrowers in other states.

Steven W. Hamm, administrator for the state's consumer affairs office, said the state is negotiating with the other investors named in the lawsuit and that it expects to get similar agreements from those investors in the near future.

Virginia officials say they cannot file a suit against Landbank and the investors who bought Landbank's loans, as South Carolina did, because they lack a strong consumer credit law.

Consumer advocates, however, believe the state could have done more.

"Most state attorneys general have the independent inherent authority to act to protect residents from being defrauded, even if not spelled out specifically in the consumer protection law of the state," DeWaal said. "In this case, with the alleged numerous usury violations by Landbank, the Virginia attorney general should have acted to protect the consumer."