DEBRA A. VALENTINE
General Counsel

MICHAEL J. BLOOM (MB 7732)
RHONDA J. MCLEAN (RM 9140)
DONALD G. D'AMATO (DD 3008)

Federal Trade Commission
One Bowling Green, Suite 318
New York, New York 10004
(212) 607-2829

Attorneys for Plaintiff

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

FEDERAL TRADE COMMISSION, Plaintiff,

v.

INTERSTATE RESOURCE CORP., a New York Corporation, JAMES LUDLOW, and JOHN O'BRIEN, 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 Southern District of New York 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 "annual percentage rate," "consumer," "consumer credit," "consummation," "credit," "creditor," "dwelling," "mortgage," "open-end credit," "payment schedule," "points and fees," "residential mortgage transaction," and "reverse mortgage transaction" are defined as set forth in Sections 103 and 128 of TILA, 15 U.S.C.  1602 and 1638, and Sections 226.2, 226.22, 226.32, and 226.33 of Regulation Z, 12 C.F.R.  226.2, 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 the15th 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 Interstate Resource Corp. ("Interstate"), is a for-profit corporation organized, existing, and doing business under the laws of the State of New York. Its principal place of business is at 254 Rt. 17K, Newburgh, NY 12550. Interstate transacts business in this district.

11. Defendant James Ludlow is President and co-owner of Interstate. 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 Interstate, including the acts or practices set forth in this Complaint. He resides and transacts business in this district.

12. Defendant John O'Brien is Vice-President and co-owner of Interstate. 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 Interstate, including the acts or practices set forth in this Complaint. He resides and transacts business in this district.

13. Defendant Interstate 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 are required to comply with applicable provisions of TILA, HOEPA, and Regulation Z.

Defendants' Business

14. Since at least November 1996, 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.

15. Defendant Interstate is engaged in subprime lending. 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.

16. Defendants' HOEPA mortgage loans typically include, inter alia, interest rates of 9.55% to 14.99% and up-front fees that include, among others, origination fees that are typically 10% of the loan amount and underwriting fees that are typically $695 or $970.

17. Approximately 25% of defendants' HOEPA mortgage loans with terms of fifteen years contain a final scheduled "balloon payment" that results from a payment schedule which provides for preceding regular periodic payments that when aggregated do not fully amortize the outstanding principal balance. This balloon payment is the amount necessary to pay the principal balance of the loan and the accrued interest on the final payment date.

18. Approximately 100% of the loans initiated by Interstate are immediately sold or assigned to a party other than Interstate.

19. In the course of offering and extending credit to consumers, defendants have failed to provide material information required to be disclosed by HOEPA and engaged in deceptive acts or practices.

20. 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)

21. In the course and conduct of offering and making HOEPA mortgage loans, defendant Interstate 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, or accurately disclose 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).
 
(b) failing to make the disclosure described in Paragraph 21(a) above and the other disclosures required by Section 129(a) of TILA, 15 U.S.C. 1639(a), and Section 226.32(c) of Regulation Z, 12 C.F.R. 226.32(c), 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).

22. By failing to disclose, or accurately disclose, material credit information, as described in Paragraph 21(a) 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 HOEPA

COUNT TWO

(Failure to Furnish Assignee Notice)

23. In the course and conduct of offering and making HOEPA mortgage loans, defendant Interstate 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).

Injury

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

This Court's Power to Grant Relief

25. 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 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 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, 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, 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,

DEBRA A. VALENTINE
General Counsel

MICHAEL J. BLOOM (MB 7732)

RHONDA J. MCLEAN (RM 9140)

DONALD G. D'AMATO (DD 3008)

Federal Trade Commission
One Bowling Green, Suite 318
New York, NY 10004
(212) 607-2829

Attorneys for Plaintiff

Dated: _______________________