FORT LAUDERDALE, Fla.-Even as the regulatory approach to curtailing the worst predatory lending practices heats up, the legal challenge to companies associated with home equity rip offs has now spread across the country. Last week, Florida Attorney General, Bob Butterworth filed a lawsuit against accused predatory lender First Alliance Mortgage Company of Irvine, California, for deceptive and predatory practices in the issuance of home equity loans in the Sunshine State. In California, the company faces a class action lawsuit for fraud that also names Lehman Brothers, the Wall Street brokerage house which raised money for First Alliance and holds an investment stake in the company. The civil complaint was filed in Broward County Circuit Court here and named company president Brian Chisick and company vice presidents Sarah Chisick, Francisco Nebot, Bruce Bollong, Jeffrey Smith and Patty Sullivan. The complaint seeks actual consumer damages and penalties of up to $15,000 per violation of the state's Deceptive and Unfair Trade Practices Act. Butterworth made the announcement during the National Conference on Preventing Crime in the Black Community, which was held in Miami. "What we have here is a terrible crime that targets senior citizens, minorities and the poor," said Butterworth. First Alliance has issued some 1,000 loans in the state, he said, totaling nearly $50 million. False advertising and other deceptive practices used by the company misrepresented the fee and interest rate structures of the loans, the complaint alleges, so that fees totaled 20% of a loan's costs. First Alliance has been the target of a Department of Justice investigation and is also being investigated in several other states, including Minnesota. The company filed for federal bankruptcy protection in March, a fact noted by Butterworth. The bankruptcy petition was filed about three months after the company produced documents required by an investigative subpoena, he said, suggesting the company's move was designed to protect itself from liability because the investigation was exposing its deliberately deceptive marketing scheme. According to the Florida complaint, First Alliance "designed and imposed upon their sales force" a purposefully deceptive strategy known internally as the "Monster" presentation. It included misrepresentations about the types of loans available, the amounts and terms of loans, loan fees, interest rates and consumers' ability to qualify for financing from other sources at more favorable rates. "The tactics used by this company amounted to predatory lending, which deceptively strips residents in our urban areas of what is often their only source of wealth- home equity they have accumulated over many decades," Butterworth said. "Needless to say, many of the victims are elderly." Butterworth said the company advertised that it charged no application fees but willfully failed to state that a comparable fee termed an "origination fee" would be charged and that the fee typically amounted to nearly 20% of the total amount of a loan. In at least one instance, he noted, a couple paid fees totaling nearly a third of the loan. In addition to the origination fee, borrowers typically were charged underwriting fees, loan processing fees and even a title review fee that duplicated a separate payment to the title company. THE MONSTER The attorney general added that the company also engaged in the practice of "flipping," under which consumers who entered variable rate mortgages were shortly thereafter induced to convert to fixed rate mortgages. Once again, he said, inflated origination fees were imposed. "It was a routine practice of First Alliance to make the initial pitch for conversion within about three months of the first payment on the adjustable rate mortgage. In many instances, the fixed rate mortgage was entered into within six months of the initial mortgage. The clear purpose was to hit borrowers with another round of exorbitant fees. To add insult to injury, an early payment penalty was also assessed against the borrower when the mortgage was converted," Butterworth said. The fast track to profit is referred to as the "Monster" a presentation also known as "The Loan Officer's Track to Run On," or simply, "The Track," according to the class action suit filed by attorney Tom Jenkins, of Jenkins & Mulligan, San Francisco. "The Track is a slick sales pitch designed to create superficial trust between the consumer and the First Alliance loan agent... it is broken down into 13 steps," states the suit. The heavy handed tactics used, Jenkins told Credit Union Times, would make honest mortgage providers blush. "It's the same old sleaze. This is the key to the whole practice. They hired snake oil salesmen from ads seeking `One-Time Closers,' and from other high-pressure sales areas like home electronics, stereos and autos." First Alliance put them through a four-week training course in which they were taught how to deflect any consumer questions about the true cost of fees by literally using sleight of hand, he said. They even put their thumbs over disclosure statements during signings or told consumers "not to worry about that." A "canned" presentation that amounted to nothing more than "gibberish" and "double talk," which sounded like legalistic precision proved convincing for many borrowers. In the end, Jenkins said, many of them simply asked the agents if the loan was a good deal, beseeching them to give them advice because they didn't know about these things. They went like lambs to the slaughter, he said. Now, many of them face foreclosure. Jenkins said the deceptive practices start with direct mail, continue through telemarketing contacts, home visits and beyond. If a borrower is late, the company has set scripts to deal with that, or with being in arrears on tax payments. Always, he said, the plan is to get them deeper in debt. "One theme runs through all of these sales materials: sell consumers the mortgage loans but cover up how much the loans will cost." It continues to this day, he said, as First Alliance has recently asked the U.S. Bankruptcy Court Judge Lynne Riddle to set a bar date for the filing of claims against it of July 5. As a means of notifying possible claimants, First Alliance will run an ad in the East and West Coast editions of The Wall Street Journal. "They submitted this without a hearing," Jenkins said. "And these `proof of claims' forms are unintelligible. I'm a lawyer, and I had trouble understanding them. The goal is clearly to confuse people and make it difficult to file a claim." Jenkins said he's volunteered to file as many claims forms as possible because many consumers who contact him have no idea of what is at stake. Many of these people are not typical readers of The Wall Street Journal, either, he said. And the bankruptcy court is entirely unsympathetic, he added. "The judge will say, `They signed the disclosures; they had to know what they were getting involved in.' The Court just doesn't understand how these people have been bamboozled. They ought to kick this case back to the District Court." Jenkins said he's been in touch with seven or eight attorneys general who are seeking to represent the consumers' interest in the First Alliance bankruptcy proceeding. That may be the last best chance for thousands of borrowers to save their homes, he said. If the bankruptcy court accepts the bar date of July 5, Jenkins estimated that less than 10% of potential claimants will file; corporate debtors will be paid from the proceeds of foreclosed homes; Wall Street backers will laugh all the way to the bank and many poor people will be left homeless. -
caburger@cutimes.com
