|The head of a California mortgage company is blaming a disgruntled former employee for triggering a federal probe into his firm. While he claims the investigation has only turned up trivial violations, he said the government has been unrelenting in its pursuit of his small firm.
In a formal complaint, the Federal Trade Commission (FTC) has charged that Chase Financial Funding of Aliso Viejo, Calif., broke the law by deceiving consumers with offers for fixed-rate mortgage loans that turned out to be adjustable rate mortgages.
But in an interview with MortgageDaily.com, Chase president James Berry, who is named in the complaint, said a disgruntled former employee altered ads that were e-mailed to the FTC.
"He had a nervous breakdown and quit," Berry said in the phone interview.
After indicating his desire to quit working at Chase, the employee returned to the office a few more times, but was eventually asked not to return by Berry.
It was sometime after that the "modified" ad was sent to the FTC.
Peggy Twohig, assistant director in the Division of Financial Practices for the FTC, called Berry's explanation "interesting."
In a phone interview Twohig said Berry has not raised the disgruntled employee defense in any of the court documents or other communications the company has had with the FTC.
The allegations have to do with spam and direct mail that was sent to consumers over a two-year period, she said.
"We're not talking about one ad," Twohig said. "The evidence will show certainly that more than one ad slipped through the cracks.
"Hundreds of consumers ...complained to us about spam from the company," she said. "We believe the evidence will show what we've alleged so far."
In the complaint filed in U.S. District Court in California, the FTC alleges that Chase -- now doing business as Choice Financial Funding -- broke federal laws by misleading and deceiving customers with ads offering "extremely low" mortgage rates," the commission said in a written statement.
Chase "duped consumers with promises of a '3.5% fixed payment 30 year loan' and a '3.5% fixed payment loan'," the FTC said. "(Chase) did not offer any such loan. The actual interest rate charged is in fact considerably higher and varies monthly."
Berry said the loan the company offered in the ad is a COFI-based adjustable rate mortgage with a payment cap option and the possibility of negative amortization.
Berry noted he received a "nasty letter" from the FTC in October of 2002.
"We never knew where this came from," Berry said. "We had no complaints whatsoever. When we finally found out, it's like, oh my gosh, we were shocked."
Berry named the employee. But because of the nature of the accusations against him, and because he could not be reached or located, MortgageDaily.com is not identifying him.
Berry said the FTC has at times been heavy handed in dealing with his company. He claims the agency has poured through random loan documents and reviewed business Chase has conducted with borrowers and lenders.
After the FTC reviewed a sample of Chase's loans, Berry said his Washington D.C. attorneys provided the files for an economist to review. According to Berry, the economist found that each of the borrowers benefited from the transactions. He noted that although a couple of the borrowers had minor complaints, none were unhappy with Chase.
The investigation has taken Berry away from his five-year-old company -- which he says has grown from 16 to 60 employees in the last few years -- and his family.
"It's just incredible that a federal agency can just completely step on us, like a sledgehammer to a gnat," Berry complained.
Twohig said that in the FTCs view "we have proceeded carefully, investigating thoroughly and bringing allegations that are serious."
On June 1, a U.S. District Judge in the Central District of California handed down a preliminary injunction "barring the defendants' illegal businesses practices," the FTC said in its written statement.
The government has also asked the court to "bar the defendants permanently from engaging in deceptive lending practices and to award relief" to the customers who were allegedly duped by the ads.
3.5% Fixed Rate???
At a time when interest rates are rising, the offer of a 3.5% fixed payment 30-year mortgage looked almost too good to be true. Turns out that was exactly the case with the offer being made by a California company, according to a federal government complaint filed in U.S. District Court in California.