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Bankrupt Subprime Lender Settles With FTC

First Alliance CEO to personally make $20 million payment in predatory case

March 22, 2002


The Federal Trade Commission (FTC) announced that it has reached a settlement in a predatory lending case with a bankrupt California-based subprime lender. First Alliance Mortgage Company and its chief executive officer, Brian Chisick, have agreed to a settlement which the FTC says could mean nearly 18,000 borrowers could receive as much as $60 million in compensation. The FTC said Chisick and his wife will personally make a $20 million payment.

According to the FTC, the amount of the settlement, which is subject to district court approval, is one of the largest consumer protection recoveries in FTC history. The case was consolidated with complaints that were previously filed by several states, the AARP, and other private parties.

The FTC says it has brought 15 enforcement actions against subprime lenders allegedly engaged in unlawful practices during the past three years.

First Alliance is accused of using a sophisticated sales presentation, known as the "Track," to gain the trust of customers and hit them with 10%-25% in fees. The company also allegedly misled customers about increases in the interest rate and the amount of monthly payments on adjustable rate mortgage (ARM) loans, and failed to provide the ARM booklet required by the Truth-in-Lending Act.

In March 2000, an investigation into First Alliance's practices by ABC News and the New York Times was broadcast on the television show 20/20. The story focused on two customers that had been charged $13,000 in origination fees -- one with only a $68,000 loan amount (after fees). In an interview with Chisick, he reportedly said that his salesmen make full disclosure and maintained that the higher fees are justified because they can result in a lower interest rate and lower overall costs to a high-risk consumer.

That story went on to say that First Alliance routinely recruited its employees from car dealerships and provided them with a script on how to gain the homeowner's trust.

Jim Ryan, the Attorney General of Illinois -- one of seven states that have sued First Alliance -- was quoted in the 20/20 story as saying, "there's this line here between aggressive advertising and marketing, and deception. We believe they've crossed the line."

Related lawsuits by private plaintiffs against Lehman Brothers, who helped in the securitization of the loans, will be preserved.

One week after the 20/20 story aired, First Alliance filed for Chapter 11 bankruptcy protection and issued a statement saying that it would stop making loans to homeowners, according to ABC News. About 300 employees were reportedly layed off.

The terms of the settlement permanently ban Chisick and his wife from engaging in the residential mortgage loan origination business in California, Florida, and Illinois. In addition, both are banned from lending in Arizona, Massachusetts and New York for ten years.

Sam Garcia has been in mortgage lending since 1980, and is managing editor of MortgageDaily.com. He also owns and operates CloseNow.com, a real estate portal site.

email: [email protected]

Copyright © 2002 Sam Garcia

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