UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

FEDERAL TRADE COMMISSION, Plaintiff,

v.

CLS FINANCIAL SERVICES, INC., a Washington corporation, and GERALD VANHOOK, individually and as an officer of CLS Financial Services, Inc., Defendants.

Civil No.

COMPLAINT FOR PERMANENT INJUNCTION
AND OTHER EQUITABLE RELIEF

Plaintiff, the Federal Trade Commission ("Commission"), by its undersigned attorneys, alleges as follows:

Jurisdiction and Venue

1. This is an action under Sections 5(a) and 13(b) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C.  45(a) and 53(b), and Section 108(c) of the Truth in Lending Act ("TILA"), 15 U.S.C.  1607(c), to obtain preliminary and permanent injunctive relief, rescission, restitution, reformation, disgorgement, and other equitable relief against defendants for engaging in acts or practices in violation of TILA, 15 U.S.C. 1601-1666j, as amended, including, but not limited to, the Home Ownership and Equity Protection Act of 1994 ("HOEPA"), as amended, and TILA's implementing Regulation Z, 12 C.F.R. 226, as amended, and for unfair or deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C.  45(a), as amended.

2. This Court has subject matter jurisdiction over this matter pursuant to 15 U.S.C. 45(a), 53(b), and 1607(c), and 28 U.S.C. 1331, 1337(a), and 1345.

3. Venue in the United States District Court for the Western District of Washington is proper under 28 U.S.C.  1391(b) and (c) and 15 U.S.C. 53(b).

Definitions

As used in this Complaint:

4. The terms "amount financed," "annual percentage rate," "closed-end credit," "consumer," "consumer credit," "consummation," "credit," "creditor," "dwelling," "finance charge," "mortgage," "open-end credit," "payment schedule," "points and fees," "residential mortgage transaction," "reverse mortgage transaction," "security interest," and "total of payments" are defined as set forth in Sections 103 and 128 of TILA, 15 U.S.C.  1602 and 1638, and Sections 226.2, 226.4, 226.18, 226.22, 226.32, and 226.33 of Regulation Z, 12 C.F.R.  226.2, 226.4, 226.18, 226.22, 226.32, and 226.33.

5. The term "HOEPA" means the Home Ownership and Equity Protection Act of 1994 which, inter alia, amended TILA by adding Section 129 of TILA, 15 U.S.C.  1639, and is implemented by, inter alia, Sections 226.31 and 226.32 of Regulation Z, 12 C.F.R.  226.31 and 226.32. HOEPA, which took effect on October 1, 1995, provides special protections for consumers who obtain high-rate or high-fee loans secured by their principal dwellings by requiring creditors to provide certain material information at least three days before the loan is consummated, prohibiting the use of certain loan terms, and barring specified practices.

6. The term "HOEPA mortgage loan" means a consumer credit transaction consummated on or after October 1, 1995, that is secured by the consumer's principal dwelling, other than a residential mortgage transaction, a reverse mortgage transaction or an open-end credit plan, in which: (1) the annual percentage rate at consummation of the transaction will exceed by more than 10 percentage points the yield on Treasury securities having comparable periods of maturity to the loan maturity as of the 15th day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor; or (2) the total points and fees payable by the consumer at or before loan closing will exceed the greater of 8% of the total loan amount or $400 (adjusted annually by the Board of Governors of the Federal Reserve System ("FRB") on January 1 by the annual percentage change in the Consumer Price Index that was reported on June 1 of the preceding year), which is covered by HOEPA, pursuant to Section 129 of TILA, 15 U.S.C.  1639, and Section 226.32 of Regulation Z, 12 C.F.R.  226.32. As used herein, the "total loan amount" is calculated as described in Section 226.32(a)(1)(ii)-1 of the FRB Official Staff Commentary on Regulation Z, 12 C.F.R.  226.32(a)(1)(ii)-1, Supp. 1.

7. The term "Regulation Z" means the regulation the FRB promulgated to implement TILA and HOEPA, 12 C.F.R. 226, as amended. The term also includes the FRB Official Staff Commentary on Regulation Z, 12 C.F.R. 226, Supp.1, as amended.

8. The term "TILA" means the Truth in Lending Act, 15 U.S.C.  1601-1666j, as amended. TILA, which took effect on July 1, 1969, is intended to promote the informed use of consumer credit by requiring creditors to disclose credit terms and costs, requiring additional disclosures for loans secured by consumers' homes, and permitting consumers to rescind certain transactions that involve their principal dwellings.

Parties

9. Plaintiff, the Commission, is an independent agency of the United States Government created and given statutory authority and responsibility by the FTC Act, as amended, 15 U.S.C. 41-58. The Commission is charged, inter alia, with enforcing Section 5(a) of the FTC Act, 15 U.S.C. 45(a), which prohibits unfair or deceptive acts or practices in or affecting commerce, and TILA. The Commission is authorized by Section 13(b) of the FTC Act, 15 U.S.C.  53(b), and Section 108(c) of TILA, 15 U.S.C.  1607(c), to initiate federal district court proceedings to enjoin violations of the FTC Act, TILA, HOEPA, and Regulation Z and to secure such equitable relief as may be appropriate in each case including, but not limited to, redress and disgorgement.

10. Defendant CLS Financial Services, Inc. ("CLS"), is a for-profit corporation organized, existing, and doing business under the laws of the State of Washington. Its principal place of business is at 4720-200th Street, SW, Suite 200, Lynnwood, Washington 98036. CLS transacts business in this district.

11. Defendant Gerald Vanhook is president and shareholder of CLS. Individually or in concert with others, at certain times material to this action, he has formulated, directed, controlled, supervised, and/or participated in the acts and practices of defendant CLS, including the acts or practices set forth in this Complaint. He resides and transacts business in this district.

12. Defendant CLS is a "creditor," as that term is defined in Section 103(f) of TILA, 15 U.S.C.  1602(f), and Section 226.2(a)(17) of Regulation Z, 12 C.F.R.  226.2(a)(17), and therefore is required to comply with applicable provisions of TILA, HOEPA, and Regulation Z.

Defendants' Business

13. Since at least October 1, 1995, defendants have maintained a substantial course of trade in offering and extending credit to consumers and others including, but not limited to, HOEPA mortgage loans.

14. Defendant CLS is a corporation engaged in business as a subprime lender. Subprime lending refers to the extension of credit to higher risk borrowers. This practice is commonly referred to as "B/C" or "nonconforming" credit.

15. Defendants' HOEPA mortgage loans typically include, inter alia, interest rates of 12 to 18.5% and up-front fees that include loan origination fees of 4% to 8% of the loan amount.

16. In the course of offering and extending credit to consumers, defendants have failed to provide material information required to be disclosed by HOEPA, included loan terms prohibited by HOEPA, and engaged in unfair or deceptive acts or practices, including, but not limited to, misrepresenting to certain consumers seeking loans that the credit offered and extended is open-end credit when, in fact, those transactions involve extensions of closed-end credit and are HOEPA mortgage loans.

17. At all times relevant to this Complaint, defendants have maintained a substantial course of trade in or affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C.  44.

Violations of HOEPA and FTC Act

COUNT ONE

(HOEPA Disclosure Violations)

18. In the course and conduct of offering and making HOEPA mortgage loans, defendant CLS in numerous instances has violated, and continues to violate, the requirements of HOEPA and Regulation Z in the following and other respects by:

(a) failing to disclose in writing the following notice:

You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan, in violation of Section 129(a)(1) of TILA, 15 U.S.C.  1639(a)(1), and Section 226.32(c)(1) of Regulation Z, 12 C.F.R.  226.32(c)(1);

(b) failing to disclose, or accurately disclose:

(i) the annual percentage rate, in violation of Section 129(a)(2) of TILA, 15 U.S.C.  1639(a)(2), and Section 226.32(c)(2) of Regulation Z, 12 C.F.R.  226.32(c)(2);

(ii) the regular payment amount, in violation of Section 129(a)(2) of TILA, 15 U.S.C.  1639(a)(2), and Section 226.32(c)(3) of Regulation Z, 12 C.F.R.  226.32(c)(3); and

(iii) specified variable rate information, in violation of Section 129(a)(2) of TILA, 15 U.S.C.  1639(a)(2), and Section 226.32(c)(4) of Regulation Z, 12 C.F.R.  226.32(c)(4); and

(c) failing to make the disclosures described in Paragraph 18(a) and (b) above clearly and conspicuously in writing at least three business days prior to consummation of a HOEPA mortgage loan transaction, in violation of Section 129(b)(1) of TILA, 15 U.S.C.  1639(b)(1), and Section 226.31(b) and (c)(1) of Regulation Z, 12 C.F.R.   226.31(b) and (c)(1).

19. By failing to disclose, or accurately disclose, material credit information, as described in Paragraph 18 above, all defendants have engaged, and continue to engage, in deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C.  45(a).

COUNT TWO

(Prohibited Loan Terms)

20. In the course and conduct of offering and making HOEPA mortgage loans, defendant CLS in numerous instances has violated, and continues to violate, the requirements of HOEPA and Regulation Z in the following and other respects by:

(a) including a prohibited "balloon payment" provision, in violation of Section 129(e) of TILA, 15 U.S.C.  1639(e), and Section 226.32(d)(1) of Regulation Z, 12 C.F.R.   226.32(d)(1); and
 
(b) including a prohibited "increased interest rate" provision, in violation of Section 129(d) of TILA, 15 U.S.C.  1639(d), and Section 226.32(d)(4) of Regulation Z, 12 C.F.R.  226.32(d)(4).

21. By including prohibited loan terms in HOEPA mortgage loan transactions, as described in Paragraph 20 above, defendant CLS has engaged, and continues to engage, in unfair acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C.  45(a). Defendant Gerald Vanhook has directed or controlled the acts and practices of CLS, and, therefore, has engaged, and continues to engage, in unfair acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C.  45(a).

COUNT THREE

(Asset-Based Lending)

22. In the course and conduct of offering and making HOEPA mortgage loans, defendant CLS has violated, and continues to violate, the requirements of HOEPA and Regulation Z by engaging in a pattern or practice of extending such credit to a consumer based on the consumer's collateral rather than considering the consumer's current and expected income, current obligations, and employment status to determine whether the consumer is able to make the scheduled payments to repay the obligation, in violation of Section 129(h) of TILA, 15 U.S.C.  1639(h), and Section 226.32(e)(1) of Regulation Z, 12 C.F.R.  226.32(e)(1).

23. By engaging in a pattern or practice of making HOEPA mortgage loans without regard to the payment ability of consumers, as described in Paragraph 22 above, defendant CLS has engaged, and continues to engage, in unfair acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C.  45(a). Defendant Gerald Vanhook has directed or controlled the acts and practices of CLS, and, therefore, has engaged, and continues to engage, in unfair acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C.  45(a).

Violations of HOEPA

COUNT FOUR

(Failure to Furnish Assignee Notice)

24. In the course and conduct of offering and making HOEPA mortgage loans, defendant CLS in numerous instances has violated, and continues to violate, the requirements of HOEPA and Regulation Z by selling or otherwise assigning such loans without furnishing the following notice to the purchaser or assignee:

Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor, in violation of Section 131(d)(4) of TILA, 15 U.S.C.  1641(d)(4), and Section 226.32(e)(3) of Regulation Z, 12 C.F.R.  226.32(e)(3).

Violations of FTC Act

COUNT FIVE

(Spurious Open-End Credit)

25. Pursuant to Sections 103(aa)(1) and 129(a) of TILA, 15 U.S.C. 1602(aa)(1) and 1639(a), and Section 226.32(a)(2)(iii) of Regulation Z, 12 C.F.R.  226.32(a)(2)(iii), HOEPA does not apply to open-end credit plans.

26. In the course and conduct of offering and making HOEPA mortgage loans, defendants in numerous instances have represented, and continue to represent, to consumers that the credit offered and extended by defendants is open-end credit.

27. In truth and in fact, in numerous instances the credit extended by defendants is not open-end credit. On the contrary, the transactions involve extensions of closed-end credit subject to HOEPA.

28. By falsely representing to consumers that the credit offered and extended by defendants is open-end credit, as set forth in Paragraphs 26 and 27 above, defendants have engaged, and continue to engage, in deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C.  45(a).

Injury

29. Consumers have suffered, and will continue to suffer, substantial injury as a result of defendants' violations of HOEPA, TILA, and Section 5(a) of the FTC Act, as set forth above.

This Court's Power to Grant Relief

30. This Court has authority pursuant to Section 13(b) of the FTC Act, 15 U.S.C. 53(b), Section 108(c) of TILA, 15 U.S.C.  1607(c), and its own inherent equitable powers, to grant injunctive relief to prevent and remedy violations of any provision of law enforced by the Commission. Defendants' violations of HOEPA, TILA, and Section 5(a) of the FTC Act have injured consumers and, absent injunctive and other relief by this Court, are likely to continue to injure consumers and harm the public interest.

Request for Relief

WHEREFORE, plaintiff respectfully requests that this Court, as authorized by Sections 5(a) and 13(b) of the FTC Act, 15 U.S.C.  45(a) and 53(b), Section 108(c) of TILA, 15 U.S.C.  1607(c), and pursuant to its own inherent equitable powers:

(1) Enter judgment against defendants and in favor of plaintiff for each violation charged in the Complaint;
 
(2) Permanently enjoin and restrain defendants from violating any provision of HOEPA, TILA, and Regulation Z, and, in connection with offering or extending credit, Section 5(a) of the FTC Act;
 
(3) Find the defendants jointly and severally liable for redress to all consumers who were injured as a result of defendants' violations of HOEPA, TILA, Regulation Z, and/or Section 5(a) of the FTC Act;
 
(4) Award such relief as the Court deems necessary to prevent unjust enrichment and to redress consumer injury resulting from defendants' violations of HOEPA, TILA, Regulation Z, and/or Section 5(a) of the FTC Act including, but not limited to, rescission or reformation of contracts, refund of monies paid, and/or disgorgement of ill-gotten gains; and
 
(5) Award plaintiff its costs of bringing this action, as well as such other additional equitable relief as the Court may determine to be just and proper.

DATED: ___________, 199__.

Respectfully submitted,

DEBRA A. VALENTINE
General Counsel

CHARLES A. HARWOOD
Regional Director

Nadine S. Samter, WSBA # 23881

George J. Zweibel, WSBA # 12444

Kathryn C. Decker, WSBA #12389

ATTORNEYS FOR PLAINTIFF
FEDERAL TRADE COMMISSION