DEBRA A. VALENTINE
General Counsel

GERALD E. WRIGHT
Federal Trade Commission
901 Market Street, Suite 570
San Francisco, CA 94103
(415) 356-5270

Attorney for Plaintiff

UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION

FEDERAL TRADE COMMISSION,
Plaintiff,
v.
CAPITOL MORTGAGE CORPORATION,
a Utah corporation, and
THOMAS D. LAKEY,
individually and as an officer of said corporation,
Defendants.

Case 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 District of Utah 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," "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 Capitol Mortgage Corporation ("Capitol"), is a for-profit corporation organized, existing, and doing business under the laws of the State of Utah. Its principal place of business is at 1104 North 1220 West, Provo, Utah 84604. Capitol transacts business in this district.

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

12. Defendants Lakey and Capitol are "creditors," 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 are 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 Capitol is a corporation engaged in business as a subprime lender. Subprime lending refers to the extension of credit to high risk borrowers. This practice is also commonly referred to as "B/C" or "nonconforming" credit. Defendants typically market HOEPA mortgage loans to, and write HOEPA loans for. individuals whose homes are in, or at risk of, foreclosure.

15. Defendants' HOEPA mortgage loans typically include, inter alia, interest rates of 18% or more, and up-front fees that include origination fees, discount fees and mortgage broker fees totaling 18% or more.

16. In the course of offering and extending credit to consumers, defendants have failed to provide material information required to be disclosed by HOEPA and TILA, included loan terms prohibited by HOEPA, and engaged in unfair or deceptive acts or practices.

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, defendants Lakey and Capitol in numerous instances have violated, and continue 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); and
(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
(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
(Denial of HOEPA Waiting Period)

20. In the course and conduct of offering and making HOEPA mortgage loans, defendants Lakey and Capitol in numerous instances have violated, and continue to violate, the requirements of HOEPA and Regulation Z by modifying, waiving or depriving consumers of the three-day waiting period between delivery of disclosures required by HOEPA and consummation of the transaction without receiving a dated written statement that describes a bona fide personal financial emergency, specifically modifies or waives the waiting period, and bears the signatures of all of the consumers entitled to the waiting period, in violation of Section 129(b)(3) of TILA, 15 U.S.C.  1639(b)(3), and Section 226.31(c)(1)(iii) of Regulation Z, 12 C.F.R.  226.31(c)(1)(iii).

21. By improperly modifying, waiving or depriving consumers of the three-day HOEPA waiting period, as described in Paragraph 20 above, all defendants have engaged, and continue 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
(Prohibited Loan Terms)

22. In the course and conduct of offering and making HOEPA mortgage loans, defendants Lakey and Capitol in numerous instances have violated, and continue 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);
 
(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); and
 
(c) including a prohibited "prepayment penalty" provision, in violation of Section 129(c) of TILA, 15 U.S.C.  1639(c), and Section 226.32(d)(6) of Regulation Z, 12 C.F.R.  226.32(d)(6).

23. By including prohibited loan terms in HOEPA mortgage loan transactions, as described in Paragraph 22 above, all defendants have engaged, and continue 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, defendants Lakey and Capitol in numerous instances have violated, and continue 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 TILA and FTC Act
COUNT FIVE
(TILA Disclosure Violations)

25. In the course and conduct of offering and making HOEPA mortgage loans and/or extending other consumer credit, defendants Lakey and Capitol in numerous instances have violated, and continue to violate, the requirements of TILA and Regulation Z in the following and other respects by:

(a) failing to make TILA disclosures in writing before consummation of a consumer credit transaction, in violation of Sections 121(a) and 128(b)(1) of TILA, 15 U.S.C.  1631(a) and 1638(b)(1), and Sections 226.17(a) and (b) and 226.18 of Regulation Z, 12 C.F.R.  226.17(a) and (b) and 226.18;
 
(b) failing to disclose, or accurately disclose, the following information:
(i) the identity of the creditor making the disclosures, in violation of Section 128(a)(1) of TILA, 15 U.S.C.  1638(a)(1), and Section 226.18(a) of Regulation Z, 12 C.F.R.  226.18(a);
(ii) the amount financed, in violation of Section 128(a)(2) of TILA, 15 U.S.C.  1638(a)(2), and Section 226.18(b) of Regulation Z, 12 C.F.R. 226.18(b);
(iii) the finance charge, in violation of Sections 106 and 128(a)(3) of TILA, 15 U.S.C.  1605 and 1638(a)(3), and Sections 226.4 and 226.18(d) of Regulation Z, 12 C.F.R.  226.4 and 226.18(d);
(iv) the annual percentage rate, in violation of Sections 107 and 128(a)(4) of TILA, 15 U.S.C.  1606 and 1638(a)(4), and Sections 226.18(e) and 226.22 of Regulation Z, 12 C.F.R.  226.18(e) and 226.22;
(v) the payment schedule, in violation of Section 128(a)(6) of TILA, 15 U.S.C.  1638(a)(6), and Section 226.18(g) of Regulation Z, 12 C.F.R.  226.18(g);
(vi) the total of payments, in violation of Section 128(a)(5) of TILA, 15 U.S.C.  1638(a)(5), and Section 226.18(h) of Regulation Z, 12 C.F.R.  226.18(h);
(vii) whether or not a penalty may be imposed if the obligation is prepaid in full, in violation of Section 128(a)(11) of TILA, 15 U.S.C.  1638(a)(11), and Section 226.18(k)(1) of Regulation Z, 12 C.F.R.  226.18(k)(1);
(viii) any dollar or percentage charge that may be imposed before maturity due to a late payment, other than a deferral or extension charge, in violation of Section 128(a)(10) of TILA, 15 U.S.C.  1638(a)(10), and Section 226.18(l) of Regulation Z, 12 C.F.R.  226.18(l); and
(ix) the fact that the creditor has or will acquire a security interest in the consumer's principal dwelling, in violation of Section 128(a)(9) of TILA, 15 U.S.C.  1638(a)(9), and Section 226.18(m) of Regulation Z, 12 C.F.R.  226.18(m); and
(c) making consumer credit disclosures that do not reflect the terms of the legal obligation between the parties, in violation of Section 226.17(c)(1) of Regulation Z, 12 C.F.R.  226.17(c)(1).

26. By failing to disclose, or accurately disclose, material credit information, as described in Paragraph 28 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 SIX
(Rescission-Related Violations)

27. In the course and conduct of offering and making HOEPA mortgage loans and/or extending other consumer credit, defendants Lakey and Capitol in numerous instances have violated, and continue to violate, the requirements of TILA and Regulation Z in the following and other respects by:

(a) failing to deliver the required notice of the right to rescind consumer credit transactions in which security interests are or will be retained or acquired in consumers' principal dwellings, in violation of Section 125(a) of TILA, 15 U.S.C.  1635(a), and Section 226.23(b) of Regulation Z, 12 C.F.R.  226.23(b);
 
(b) failing to deliver two copies of the required notice of the right to rescind to each consumer entitled to rescind, in violation of Section 125(a) of TILA, 15 U.S.C.  1635(a), and Sections 226.17(d) and 226.23(b) of Regulation Z, 12 C.F.R.  226.17(d) and 226.23(b);
 
(c) disbursing money before the TILA rescission period has expired, in violation of Section 125 of TILA, 15 U.S.C.  1635, and Section 226.23(c) of Regulation Z, 12 C.F.R.  226.23(c);
 
(d) modifying, waiving or depriving consumers of the right to rescind without receiving a dated written statement that describes a bona fide personal financial emergency, specifically modifies or waives the right to rescind, and bears the signatures of all of the consumers entitled to rescind, in violation of Section 125(d) of TILA, 15 U.S.C.  1635(d), and Section 226.23(e) of Regulation Z, 12 C.F.R.  226.23(e); and
 
(e) engaging in any of the practices described in Paragraph 30(a) through 30(d) above, thereby depriving consumers of the right to rescind, in violation of Section 125(a) of TILA, 15 U.S.C.  1635(a), and Section 226.23(a) of Regulation Z, 12 C.F.R.  226.23(a).

28. By failing to disclose, or accurately disclose, material information relating to, or making misrepresentations regarding, the TILA right of rescission, as described in Paragraph 30 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).

Violations of TILA
COUNT SEVEN
(Record-Keeping Violations)

29. In the course and conduct of offering and making HOEPA mortgage loans and/or extending other consumer credit, defendants Lakey and Capitol in numerous instances have violated, and continue to violate, the requirements of TILA and Regulation Z by failing to retain evidence of compliance with Regulation Z for two years after the date disclosures are required to be made or action is required to be taken, in violation of Section 226.25(a) of Regulation Z, 12 C.F.R.  226.25(a).

Injury

30. 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

31. 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.

Respectfully submitted,

CARLIE CHRISTENSEN
Assistant United States Attorney
District of Utah
185 South State Street, #400
Salt Lake City, Utah 84111-1506
(801) 524-5682

DEBRA A. VALENTINE
General Counsel

DATED:
GERALD E. WRIGHT
Attorney
Federal Trade Commission Attorneys for Plaintiff