The lender talked the borrower into this by putting cash in the borrower's pocket. But the borrower was saddled with a larger repayment obligation that he couldn't meet, resulting in default. This constituted legal thievery of the borrower's equity. Home improvement scams work in a similar manner. Gullible home owners are sweet-talked into contracting for repairs for which they are overcharged, and then the cost of the repairs plus high loan fees are rolled into a mortgage that they cannot afford.
Default follows and the borrower loses the home.
Equity grabs are extremely difficult to regulate away because they represent an abusive application of legitimate activities. Most borrowers who do a cash-out refinance retain their equity, and this is true as well for most of those who take out home improvement loans. Lenders who provide subsidized loans can prevent equity grabs through cash-out refinancing by incorporating restrictive provisions in the first mortgage. Beyond that, about the only remedy that doesn't hurt more people than it helps is provision of counseling directed at potential victims. But people can't be compelled to seek counsel, or to listen when they receive it.