A federal bankruptcy judge this week approved a controversial plan that allows thousands of Virginians who borrowed money from the now-defunct Landbank Equity Corp. to collect rebates of fees paid to Landbank.

Despite approval of the plan, however, consumer advocates have filed a class-action suit in Norfolk seeking to release Virginia borrowers from all the terms of their Landbank loans.

Landbank, a Norfolk second-mortgage company, operated in five states for several years and claimed at one time to be the largest second-mortgage company on the East Coast until being forced into bankruptcy by financing problems last fall.

The company, now being liquidated by the bankruptcy court, is the target of a federal fraud investigation based on allegations that Landbank charged exorbitantly high discount points and interest rates on second mortgages made to people desperate for extra cash, many of whom were illiterate, poor, elderly or unemployed.

In some cases, Landbank allegedly charged interest rates as high as 30 percent or charged discount points that amounted to as much as 40 percent of the loan. Landbank officials have denied there was anything illegal about their loans or lending practices.

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

The plan approved by Norfolk Judge Hal J. Bonney Jr., which was negotiated by the office of Virginia Attorney General Mary Sue Terry, allows lenders who purchased second mortgages from Landbank to rebate to the borrowers some of the fees charged by Landbank.

In accepting the rebates, borrowers would give up their right to take the lenders to court over the issue of whether the loans were valid because of Landbank's allegedly fraudulent lending practices. The state, by approving the plan, also has given up the legal right to challenge the validity of the Landbank loans on behalf of Virginia residents.

Consumer advocates in Virginia, however, say that the settlement is not adequate and that they expect many of the 5,300 Virginians who borrowed from Landbank to reject the terms of the plan.

"We think that a majority of the clients being represented by the Legal Aid Society in Virginia will not take the settlement offered," said Gilman P. Roberts Jr., an attorney for the Tidewater Legal Aid Society. "A number of our clients still stand to lose their houses even if they accept the [rebates.] It doesn't do enough for many of them."

The plan calls for all 35 of the companies that bought Landbank loans made with Virginia borrowers to rebate to the borrowers 40 percent of the discount points they paid on their Landbank loans. A point is equal to 1 percent of the amount of the loan.

In addition, borrowers would get a $100 payment to compensate for excessive origination fees charged by Landbank, and borrowers who are delinquent on their loan payments would be allowed to start payments again with no penalties. Those who have lost their houses through foreclosure would be allowed to buy them back, if they have not been sold to someone else.

The rebates, which would average $1,900 per borrower, would cost the investors an estimated $10 million if accepted by all the Landbank borrowers.

Roberts said the class-action suit was filed on behalf of several individual borrowers who represent the overall group of borrowers allegedly defrauded by Landbank.

He said the court was expected to rule in the next few months on whether all the people in the state who borrowed from Landbank should be included in the suit. If the court qualifies the borrowers as a class, those people with Landbank loans will be given the opportunity to join the suit.