In what officials called the largest case of its kind in history, the Federal Trade Commission and six state attorneys general yesterday announced a “predatory lending” agreement with Irvine, California-based First Alliance Mortgage Company.

As part of the settlement, as much as $60 million from the assets of First Alliance will be distributed to an estimated 18,000 homeowners around the country who allegedly were charged excessive fees and interest rates on loans they obtained from First Alliance between 1992 and 2000. The settlement charged that First Alliance fraudulently misled borrowers into believing their loans came with minimal fees and moderate interest rates, when in fact the fees went as high as 24 percent of the total mortgage principal in some cases.

The firm, which has been in bankruptcy proceedings, was first sued by the FTC in 2000. Six states--Arizona, California, Florida, Illinois, Massachusetts and New York--and the American Association of Retired Persons (AARP) sued First Alliance and its CEO, Brian Chisick, charging violation of federal and state lending laws. The cases were consolidated in federal court, leading to yesterday’s agreement. As part of the settlement, none of the defendants admitted any wrongdoing. The $60 million will come from First Alliance financial assets, personal funds of the Chisicks, insurance policies and other sources.

During the 1990s, First Alliance was one of the nation’s largest “subprime” mortgage lenders, specializing in loans for homeowners with poor credit ratings and modest incomes. The federal complaints alleged that First Alliance marketed its loans using sophisticated techniques designed to mislead many borrowers. Consumers who visited First Alliance offices in 18 states typically were subjected to a lengthy sales presentation known inside the firm, according to the FTC, as the “Track.” The presentations glossed over the existence of substantial “points”--each equivalent to one percent of the amount being borrowed--and grossly understated interest charges on mortgages take out by thousands of unsuspecting borrowers.

In the case of certain adjustable rate mortgages made by First Alliance, according to the FTC, interest rates increased by 1 percent every six months, while borrowers thought they were indexed to national rate movements. The firm targeted “vulnerable” homeowners, often senior citizens with no mortgage debt, and persuaded them to take out loans that they may not have actually needed, said federal lawyers.

The average refund to victimized borrowers, according to FTC chairman Timothy J. Muris, will be somewhere between $2,500 and $3,300. Though many borrowers will not be fully compensated for their actual overcharges by First Alliance, officials said, the settlement represents as much as could be negotiated under the circumstances of a firm in bankruptcy proceedings. Under the agreement, Brian Chisick and his wife will contribute $20 million to a “redress fund” to be administered by the FTC. Both Chisicks will also be prohibited from working in the home lending business in several states.

According to Muris, “the message (of the First Alliance settlement) should be unmistakable. Fraud and deception by subprime lenders will not be tolerated.” Since 1998 the FTC has brought 15 cases against home mortgage lenders engaged in what it says are illegal practices, including a major pending suit against Citigroup.

At a press conference, California Attorney General Bill Lockyer called yesterday’s settlement “a splendid victory.”

“There are wolves out there that prey on complacent sheep,” he said in a pointed warning to predatory lenders. “We are the hunters.”

Published: March 22, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.