I found a 500 service manual in my download files. (Tension page below.) What's happening is that the thread comes out of the take up spring when you start to sew.
Screw C is is further to the left in slack thread regulator D than is specified in the manual. It says 1/16 to 3/32. Measuring with a hem gauge, it appears to be about an 1/8, which if my grade school math is correct is 4/32. Could that be the problem?
(I'm definitely not an experienced person at mechanics, so I don't want to mess up something worse than it already is.)
bkay