Marc Dann - The attorney general entered office with guns blazing.

The line outside Ed Kramer's office seemed never-ending. Every day, more people filed into the Cleveland fair housing lawyer's office with tales of foreclosure. And there was an unmistakable pattern: Nearly all were poor people of color, and all had been locked into unaffordable loans, with high interest rates and exorbitant broker fees.

For every foreclosure plight Kramer and his firm, Housing Advocates Inc., took on, he learned that 20 others, with claims just as good, had lost their homes because of a predatory loan. There was no way to represent everyone in need. Kramer's law practice had only a handful of attorneys; resources were stretched thin.

The problem wasn't going away. Something needed to change.

"We cannot solve this problem of predatory lending on a piecemeal basis," a fed-up Kramer told colleagues earlier this year.

So, after 32 years of applying state and federal fair housing statutes to defend clients against unfair housing providers, Kramer decided it was time to use the same laws differently. In April, Kramer turned plaintiff and filed a class-action complaint that goes past individual brokers and at the banks and mortgage companies that, he says, paid the brokers to target African Americans.

The suit represents a tectonic shift in how predatory lending cases are handled. Case-by-case approaches have left attorneys and investigators unable to detect larger patterns of racially motivated lending. But now, Kramer's new approach, and pricing data available only since 2004, has emboldened a host of players - all separately coming to the conclusion that it's time to switch targets: to the banks and investment firms.

Since loan-pricing data first became publicly available, at least 200 lenders have come under the scrutiny of federal regulators for high correlations between their subprime products and minority clients. Agencies like the U.S. Department of Housing and Urban Development have continued to mine the new databases, adding more lenders to a growing list of investigations.

Ohio's attorney general is looking at ways to take the fight directly to Wall Street, with both civil complaints and criminal indictments alleging that investment banks either knew about the fraud, or should have.

Combined, the efforts are aggressive and the first of their kind to go systematically beyond the individual mortgage broker and after the banks that underwrote the problem loans. It's also uncharted territory, and the learning curve is steep. The significant time and resources being allocated to predatory lending investigations suggests that not only is there meat in the discrimination theory, but that, at last, government regulators might be able to take a big bite.

WHETHER IT'S CALLED ABUSIVE, predatory or steering, such practices have been known to federal regulators since the early 1990s, when the subprime lending market started on its exponential rise.

Consumer advocates across the country were the first to arrive on the frontlines. They alleged that some lenders work hand in hand with brokers to hone in on low-income and minority communities, and peddle fee-packed, high-interest loans.

The banking industry continues to scoff at this suggestion, claiming that the poor receive more onerous terms because they have the worst credit. If there's been fraud, fault the street-level brokers, banks say.

There's plenty of blame to go around, however, including some for the federal banking regulators, who've done little with their power to delve into suspect lenders' proprietary databases to find evidence of illegal practices.

The Justice Department, which can initiate litigation if it sees a pattern of prejudice, last had a flurry of anti-predatory lending prosecutions during the Clinton administration's early years. Only seven lenders were brought to account.

The predatory lending fallout, however, which could reach a record 17,000 foreclosures by year's end (and that's a low estimate) in Cuyahoga County alone, goes far beyond a handful of banks. The numbers are finally grabbing the attention of federal officials like the ones at the Federal Reserve Board.

In 2004, the Fed changed loan reporting requirements to include pricing information from a wide variety of mortgage lenders (under the Home Mortgage Disclosure Act, HMDA). When the Fed released an analysis of the newly available loan-pricing data the following year, the findings echoed what community activists had been shouting for the last decade: 30 percent of blacks and 20 percent of Latinos had received higher-interest, subprime home loans, compared to only 9 percent of whites.

It wasn't proof that minorities with credit scores comparable to whites were targeted for higher-fee, higher-penalty, predatory loans. (That lay inside banks' proprietary databases on borrowers' credit scores and histories.) But it was enough to identify which financial institutions were issuing high-interest loans primarily to people of color, and give federal regulators reason to demand the necessary proprietary information.

BRYAN GREENE IS A BUSY MAN. The deputy assistant secretary of enforcement and programs in HUD's Office of Fair Housing and Equal Opportunity found a moment to talk with the Free Times while waiting to catch a train in a noisy Washington, D.C. station.

After the Fed's 2005 data analysis, HUD received the lion's share of lenders singled out for review - about 180 of 200, Greene says. That's because many are "non-bank" mortgage companies that don't fall under the purview of federal banking regulators. HUD, on the other hand, has a general mandate to enforce the Fair Housing Act against anyone engaged in mortgage activity. In 2006, HUD officials conducted their own analysis of subsequent HMDA data and launched investigations into even more lenders.

Greene says it's "definitely the largest effort of its kind." He won't say how many companies are under the microscope, but confirms that several investigations are ongoing.

That's an important step. "If loans are priced too high and in a discriminatory fashion," Greene says, "these subprime loans may be posing a barrier to home ownership." So, he adds, "we're looking specifically at whether pricing disparities in subprime loans are discriminatory."

And HUD is demanding all sorts of proprietary information to help it along. "To see fire, you need credit data because [the Fed's] HMDA data only shows smoke."

For each lender, HUD wants to know about all the loans in a given year, what kinds of products were offered, at what prices and with what requirements. HUD investigators are combing through each loan application to see how equally qualified applicants were treated. Teams of economists are performing intricate, time-consuming econometric analyses.

All this amounts to an avalanche of predatory lending investigations inside HUD, and the agency is "devoting significant resources to do this right," Greene says. The department is about to hire another economist and five others to create a special unit dedicated to fair-lending investigations.

"We've made this a priority," Greene says. "Resources are extensive because doing a lending investigation is complex."

The first investigations began in late 2005, shortly after the Fed's HMDA data analysis. It's taking years, however, because of the unprecedented nature of these predatory lending investigations, Greene says. "The HMDA data is new, and these investigations are new, and involve a learning curve," Greene says. Different federal agencies are even swapping notes on their progress. (See sidebar.)

If evidence of discrimination is found, charges will be filed with HUD's own administrative law judges, who have the authority to issue monetary damages and injunctions. Lenders have the right to go before a federal judge, in which case the matter would pass into the hands of the Justice Department.

MEANWHILE, HUD CONTINUES to receive almost 200 new complaints a year, from consumer advocates and individuals, alleging unfair mortgage lending practices.

One of these is Housing Advocates' Ed Kramer. Kramer's law firm represents a wide range of fair-housing issues, from people facing eviction to landlords withholding rental units from nonviolent ex-felons. The predatory lending cases outnumber all the rest. Kramer learned that banks and mortgage companies were giving huge incentives to independent brokers, in the form of fees passed on to the borrower, for soliciting and originating high-cost loans.

Unable to stem the tide of foreclosures, and unable to help the thousands of people he sees drowning in debt, Kramer decided to take a different tack.

In April, Kramer himself invoked city, state and federal fair housing laws in a complaint filed against Argent Mortgage Co. (the biggest subprime lender in Cleveland) and Wells Fargo Bank. (The Fair Housing Act allows organizations to file complaints if the discrimination in question is taxing their resources.)

The charges, however, are quite different from what HUD is used to seeing. Kramer is going after the banks that he says fuel the bad loans but plead ignorance about predatory lending. "We're saying that they have set up a system on an institution-wide basis," Kramer says. "And we're asking for relief, not just for one family or a few families, but for all families [affected]."

Argent, Kramer argues, worked with brokers to coax minority homeowners into predatory loans with misleading marketing. Wells Fargo allegedly helped fuel these practices by buying Argent's loans on the secondary market without ensuring that they were legit. Argent denies the accusations. Wells Fargo did not return calls.

"It's not very common that people have gone beyond the broker to the secondary market purchasers," says Bryan Greene, in HUD's fair housing and equal opportunity office. Such cases are tough. Dragging individual brokers into civil and criminal courts is easier. Much more difficult is proving that mortgage banks and lenders were involved, or knew what the brokers were up to.

Housing Advocates' complaint is now with Cleveland's Fair Housing Board, and HUD has authorized the Ohio Civil Rights Commission to investigate at both the state and federal level.

Using the Fair Housing Act is a potent plan of attack, one that Kramer hopes others will adopt. At an April conference, Housing Advocates' staff plied attorneys from cities across Cuyahoga County. Panels and talks focused on federal enforcement of the Fair Housing Act, and "Hot Topics in Fair Housing Litigation."

Officials from Cleveland's departments of law, community development, community relations and consumer affairs attended. (Cities can file lawsuits under the Fair Housing Act by arguing that the predatory lending contributes to poverty and crime.) They would not comment on possible legal actions, but Director of Consumer Affairs Angel Guzman confirmed that he is working closely with the law department "to see what we can do."

Bill Gruber, the chief legal counsel for Shaker Heights, also attended, and says he has spoken to fair housing lawyers about how to go after banks. Such litigation, he cautions, is expensive, so the city wants to find a foolproof strategy.

ALSO ON THE PROWL is Ohio Attorney General Marc Dann.

Shortly after coming into office, Dann created a statewide Predatory Lending Task Force with headquarters in Cleveland and bureaus in major cities across the state. Attorneys and investigators under this special branch are pursuing both criminal and civil actions. (Expanded state powers of prosecution, available only since January, finally allow the attorney general to go after loan officers and mortgage brokers in addition to banks.)

Now, working without a mortgage broker's license is a crime. Not considering a borrower's ability to repay a loan is a civil violation of Ohio's licensing terms.

Dann is also deploying Ohio's racketeering laws. The Ohio Organized Crime Investigation Commission, which Dann chairs, has set up within the statewide task force. The commission, with access to state-of-the-art surveillance and communications equipment, is in the business of teaming with local law enforcement agencies (like FBI field officers and county prosecutors) and coordinating cases around racketeering charges.

Ed Krauss heads the Predatory Lending Task Force out of Cleveland.

Three countywide squads have been formed so far, he says, with several investigations underway. The attorney general's office is providing the necessary legal expertise in consumer protection, anti-trust, securities and civil rights laws.

"These are difficult crimes to prove," Krauss says. "So we all need to be on the same page and coordinate our efforts."

On the civil side, Dann is brandishing Ohio's new and improved consumer protection laws.

The effort is unprecedented and is already showing results. In March, Dann won an injunction against the bankrupt, California-based lender New Century Financial Corp. Dann now gets to examine every foreclosed loan for traces of predatory lending. If he finds what he's looking for, he could convince New Century to help borrowers out of those terms.

Last month, Dann sued 10 mortgage brokers and lenders for trying to influence appraisers' valuation of properties. Such action would have been impossible before January, when the General Assembly gave the attorney general new powers to go after a larger cast of characters.

Dann's requests for redress are whopping: He wants the courts to declare such practices illegal, place permanent injunctions on this kind of behavior, fine firms for $25,000 each, and order them to reimburse customers for "unfair, deceptive, and unconscionable acts."

BEHIND THE BANKS and mortgage companies are the Wall Street investment trusts that snapped up thousands of mortgage loans on the secondary market, sold them off as mortgage bonds, and provided a free flow of cash to the brokers and lenders to originate even more loans. But they, and the rating agencies that failed to warn investors against suspect loans, are nearly impossible to touch.

Only one case has come forward so far. In 2003, the investment bank Lehman Brothers was found guilty by a federal jury of knowingly participating in predatory lending activities.

Attorneys for more than 7,500 homeowners convinced the jury that Lehman Brothers bought more than $400 million worth of subprime loans from First Alliance, a mortgage lender, despite knowledge that First Alliance was preying on the elderly with high-pressure marketing gimmicks that hid the high fees inside its loans.

The smoking gun, it seems, was found in internal documents. A Lehman executive, after visiting First Alliance, described it in a memo as "the used car salesperson of the subprime credit market," the New York Times reported in 2003. And that it was "a requirement to leave your ethics at the door."

So similar cases are a long shot, especially as the industry is structured to safeguard Wall Street, and banking firms with federal charters are usually protected from state regulators. Yet Dann is ready to take the gamble - and possibly become the first state attorney general to do so. He's reviewing hundreds of complaints, and talking with informants. "We're going to take [the cases] to where they lead us," Dann says about Wall Street.

"I want to see the e-mails, I want to see the documents," Dann told Bloomberg News in May. "I'm guessing somebody at some or all of these places was predicting the bottom was going to fall out."

According to Kathleen Engel, a law professor at Cleveland State University who focuses on predatory lending and housing discrimination, the trusts will probably plead ignorance. Once they buy loans from brokers and lenders, the trusts will argue, they only "hold" the loans. How the loans were made and under what terms just isn't their business. But they still claim the right to collect on the loans, no matter how dirty.

Dann isn't buying it.

"There's evidence that people on Wall Street knew or should have known," he says. "People ought to be held responsible for the people they ripped off." Dann means to bring cases forward as quickly as possible.

Dann's ultimate hope is for monetary damages or settlements. "Money helps communities," he says. "If we can get money in those judgments against the people who profited, that money can be used to help homeowners."

That won't be easy. Despite the verdict against Lehman Brothers in 2003, the jury made the investment bank pay only 5 percent of the $50 million damage award. The rest was assessed to mortgage lender First Alliance.

MULTI-PRONGED ATTACKS from federal regulators, consumer advocates and Ohio's attorney general are taking their toll, at least on the second tier of mortgage banks and lenders. The Web site Mortgage-Lender Implode-O-Meter (ml-implode.com) tracks mortgage lenders going bust. The number has climbed from less than 10 last December to 96 as of press time.

Pending lawsuits and federal and state investigations aren't helping.

"The [mortgage banks and lenders] should take a close look at their practices," says HUD's Bryan Greene, because the government is.

The investment banks meanwhile - many of which are now pulling the plug on their subprime lenders - are trying to placate investors in a market going bust. Appeasing government regulators and, increasingly, legislators could be another matter entirely.

NOWHERE TO HIDE

According to an October 2005 Washington Post article, the names of lenders that should be investigated were passed to an assortment of federal regulators. For example, the Office of Thrift Supervision, which regulates savings and loans, received less than 50 names, while the National Credit Union Administration received two. Neither agency returned calls seeking comment on the status of these investigations.

The Federal Trade Commission, which enforces the Equal Credit Opportunity Act, and the Federal Deposit Insurance Corp., which insures and oversees registered banks, told the Post that they were reviewing HMDA data. When reached by the Free Times for this story, spokespersons said they could not comment on whether any inquiries were underway.

In March, however, the chairwoman of the FDIC, Sheila Bair, told a Congressional committee that "although the work of the FDIC in this area is ongoing, we have referred two of these matters to the Department of Justice for enforcement action."

In addition to using the Fair Housing and Equal Credit Opportunity Acts, federal regulators can bring civil actions through the Truth in Lending Act, Real Estate Settlement Procedures Act, Unfair and Deceptive Acts and Practices, Racketeer Influenced and Corrupt Organizations Act, mail and wire fraud and civil rights laws.