The Federal Trade Commission has filed a seven count complaint in federal court against "subprime" lender First Alliance Mortgage Company ("FAMCO") and two affiliated companies alleging violations of the Federal Trade Commission Act ("FTC Act") and the Truth in Lending Act's ("TILA") implementing Regulation Z. The complaint seeks an order prohibiting future violations and providing redress to consumers.
The FTC's complaint names FAMCO of Irvine, California, First Alliance Corporation, also based in Irvine, and a wholly-owned subsidiary, also named First Alliance Mortgage Company and headquartered in Bloomington, Minnesota. The First Alliance Companies operate throughout the United States and are among the nation's largest subprime lenders.
The Companies offer home equity loans primarily secured by first mortgages on the borrowers' homes. According to the FTC complaint, the First Alliance Companies target - through telemarketing and direct mail solicitations - homeowners with poor credit histories who might experience difficulty securing conventional home equity financing. Loan officers with the First Alliance Companies use a lengthy, 13-step sales presentation, known as "the Track," to sell loans. The complaint alleges that, through the use of the Track, the First Alliance Companies mislead consumers about the existence and amount of origination fees for its loans (which are typically 10% to 25% of the loan) and the interest rate and monthly payments of their adjustable rate mortgage ("ARM") loans. As a result, according to the complaint, consumers believe they are borrowing less money at lower interest rates than they actually are.
"Lying about loan terms is bad, period,"said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "But systematically lying to homeowners whom you know to have poor credit histories is just unconscionable." Bernstein noted that the FTC's action against the First Alliance Companies is part of the Commission's ongoing enforcement effort to curb abusive and predatory practices in the subprime mortgage industry.
The complaint alleges that the First Alliance Companies violated Section 5 of the FTC Act because they did not have a reasonable basis to substantiate their claims that consumers will save money when consolidating debts through a First Alliance loan. The First Alliance Companies also have misrepresented the terms and conditions of the ARM loans that they make to a majority of their borrowers, the complaint alleges. These ARM loans include short-term, front-end "teaser" interest rates that apply only for the first six months of the loan. The First Alliance Companies allegedly have misrepresented that the initial "teaser" rate will remain constant unless market interest rates increase. In fact, the interest rate on these loans increases as much as one percentage point every
six months, regardless of market conditions.
The complaint also alleges that the First Alliance Companies have falsely represented that borrowers can obtain a loan without closing costs or fees. In fact, borrowers are charged substantial loan origination fees, typically 10% to 25% of the loan amount.
In addition, according to the FTC complaint, the First Alliance Companies have misrepresented that the total amount borrowed on its loans, and upon which interest accrues, is the "amount financed" that appears on the TILA disclosure statement. In fact, the "amount financed" does not include loan origination fees. Further, the companies have allegedly misrepresented that the loan origination fees (and other prepaid finance charges) are part of the interest payments on the loan.
Finally, the complaint alleges that the First Alliance Companies violated TILA's implementing Regulation Z by failing to provide borrowers who have ARM loans with a required booklet explaining how ARM loans work.
The FTC filed its complaint in the U.S. District Court for the Central District of California, in Santa Ana, on October 3, 2000. The Commission vote authorizing staff to file the complaint was 4-0, with Commissioner Orson Swindle not participating.
NOTE: The Commission files a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that a defendant actually has violated the law. The case will be decided by the court.
Copies of the complaint are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; toll-free: 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877- FTC-HELP (1-877-382-4357), or use the complaint form at www.ftc.gov. The FTC enters Internet, telemarketing, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies worldwide.
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Bradley H. Blower or John Krebs
(Civil Action No: SACV-00-964 DOC (EEx))
(FTC File No.: 002 3345)