FTC Files Lawsuit Against Mortgage Firm First Alliance

A federal agency said Wednesday it has sued beleaguered mortgage lender First Alliance Corp., joining several states that have accused the Orange County company of deceiving thousands of low-income borrowers nationwide.

The lawsuit by the Federal Trade Commission, filed Tuesday in federal court in Santa Ana, marks the first time the federal government has taken action against the Irvine firm, once a major lender to those with poor or no credit.

First Alliance executives denied the FTC charges and dismissed the suit as political grandstanding.

FTC officials said the seven-count complaint is part of an effort to crack down on mortgage lenders who engage in predatory practices, such as hiding loan fees, lying about interest rates and using overly aggressive sales tactics to sell consumers loans they cannot afford. The agency has filed 10 similar cases over the last 15 months.

First Alliance has become a lightning rod for protests against the sub-prime mortgage industry, which makes many of its loans to low-income homeowners. The company filed for bankruptcy protection in March amid a wave of lawsuits and a half-dozen state investigations into allegations of predatory lending.

“This [FTC action] sends a message to sub-prime lenders that if they engage in abusive practices, they won’t be protected by filing for bankruptcy,” said Brad Blower, an FTC attorney who is handling the case.

Consumer advocates welcomed the move, but questioned whether the federal action would have much impact because First Alliance already has shut down operations and is liquidating its assets.

“I don’t criticize the FTC, but with limited resources, it might be better to file a suit against a company that’s still in business so you can influence its behavior,” said Robert Gnaizda, general counsel of Greenlining Institute, a San Francisco consumer group working on behalf of borrowers.

The FTC complaint seeks to force First Alliance to provide refunds for borrowers or allow them to rescind their high-cost loans. A similar effort already is underway in the company’s Chapter 11 bankruptcy proceeding in Santa Ana, where borrowers are emerging as a key creditor group.

Blower said any judgment the FTC wins would be transferred to the Bankruptcy Court for distribution to consumers.

Doris Jones, a First Alliance borrower who lives near Gardena, said Wednesday that she was happy to see the federal government turn up the heat on the mortgage lender.

“I’m glad, because the federal government has not appeared very interested in what is happening to [First Alliance] borrowers like me, but I don’t know if it’s going to help me keep my home,” said Jones, a 72-year-old widow.

In 1998, when her son became ill and needed money, Jones agreed to borrow $5,000 from First Alliance. She ended up with a $10,000 mortgage and monthly payments equal to about 60% of her fixed monthly income.

Unable to afford the payments, she defaulted and declared bankruptcy this summer in a last-ditch effort to keep her home. First Alliance has sold her loan and the new owner is moving to foreclose.

First Alliance executives complained that their company had become an easy target for government regulators eager to prove they are taking steps to stop abusive lending practices.

“We have never heard one word from the FTC before this,” said Brian Chisick, chairman of First Alliance. Chisick said it was “puzzling” that the FTC would seek to reform First Alliance’s business practices when the company already has ceased operations.

“The company went to great lengths to make sure that all terms of each loan were fully disclosed to customers and that all regulatory requirements were followed,” Chisick said.

The FTC suit includes many of the same complaints raised by borrowers and state regulators over the past two years.

Specifically, FTC accuses First Alliance of violating the Truth in Lending Act and the Federal Trade Commission Act by misleading customers about the terms and fees of their loans. In many cases, fees totaled 10% to 15% of the loan amount.

The FTC also objected to the company’s training manual, which it said taught employees to deceive borrowers with false and misleading statements.

The U.S. Department of Justice and U.S. Department of Housing and Urban Development also have been looking into First Alliance’s practices.

Last week, HUD officials called for a freeze on foreclosure proceedings against homeowners with government-backed mortgages who may have been victims of unscrupulous lending practices. HUD plans to send 60 staffers to Southern California to ensure that lenders making government-insured loans are following federal guidelines.

Gnaizda praised HUD and the FTC for being two of the most assertive federal agencies in reining in rogue mortgage lenders and called upon the Federal Reserve Board and other financial regulators to step up their own efforts.

He and other consumer groups want government regulators to increase the pressure on Wall Street investment firms that supply money to lenders such as First Alliance.

“They ought to be dealing with the source of the money,” Gnaizda said.