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Attorney General Bill Lockyer Announces Settlement of Major Predatory Lender Lawsuit
First Alliance Mortgage Company Turns Over Assets to Consumers, States
(WASHINGTON, D.C.) – California Attorney General Bill Lockyer today announced a $60 million settlement of a multi-jurisdictional lawsuit against First Alliance Mortgage Company and its chief executive officer for violations of federal and state laws governing consumer home mortgage loans.
"First Alliance lied about the terms of its loans, masking the exorbitant fees it charged as well as the fact that monthly payments would escalate," Lockyer said. "The company's deceptive practices placed thousands of California homeowners, many of them elderly, at risk of losing their homes. This settlement provides some justice for First Alliance's victims."
Believed to be the largest recovery against a predatory lending company in the country, the settlement resolves unlawful business practice claims against California-based First Alliance Mortgage Company, three related companies and the companies' principal owners, Brian and Sarah Chisick.
The settlement requires the company's assets to be liquidated in bankruptcy court and turned over to a consumer redress fund that will be administered by the Federal Trade Commission (FTC). If approved by the federal district court in Santa Ana, about $60 million will be made available to consumers who obtained loans from the company between January 1, 1992, and March 23, 2000, when the company declared Chapter 11 bankruptcy. The agreement also provides additional funds to pay prosecution costs and a portion of bankruptcy claims of various creditors and former First Alliance employees and shareholders. See also Notice for Refunds.
First Alliance, headquartered in Irvine, was founded in the early 1970's by Brian Chisick. During the 1990's First Alliance sold approximately 18,000 home equity loans nationwide that were primarily secured by first mortgages on single-family residences. Of the 18,000 loans sold, more than one-third were to California residents.
Lockyer and other officials alleged in their complaint that First Alliance deceived borrowers about the terms of their loans using a carefully crafted and misleading sales presentation that was based on a training manual called the "Track." All of First Alliance's loan officers were required to memorize the "Track" in a weeks-long training course. Through the "Track" system, First Alliance's loan officers led borrowers to believe that they were not paying any loan origination fees, or "points." In fact, borrowers were paying loan origination fees as high as 25% of the amount of the loans.
The complaint further alleged that First Alliance, through telemarketing and direct mail solicitations, offered loans to borrowers without regard to their ability to repay the loans. Many of those targeted were elderly homeowners who had built up significant equity in their homes, but were living on fixed incomes of social security benefits and pensions.
The complaint also alleged that First Alliance made numerous other misrepresentations to its borrowers in violation of state and federal laws, including:
Misrepresented the interest rate and monthly payments on their adjustable rate mortgage loans ("ARM" loans). The ARM loans, which First Alliance made to a majority of its borrowers, included "teaser" interest rates that applied only for the first six months of the loan. While First Alliance represented that the initial "teaser" rate would remain constant unless market interest rates increased, the interest rate automatically increased as much as one percentage point every six months, regardless of market conditions.
Falsely promised lower and affordable monthly payments by failing to disclose that monthly payments on the ARM loans would steadily increase over the course of a few years, often beyond amounts that borrowers could afford.
Failed to provide consumers obtaining ARM loans with required information explaining how these loans worked in violation of the federal Truth-in-Lending Act.
Several conditions must be met before the settlement becomes effective and money can be distributed to consumers, including court approval of both the settlement and the bankruptcy liquidation plan that First Alliance will be filing. Under the settlement, borrowers will receive a notice from the FTC explaining in detail the agreement and what actions they must take to receive their distribution.
Under the terms of the agreement, defendants Brian and Sarah Chisick will be permanently enjoined from engaging in the residential mortgage loan origination business in California, Florida and Illinois, and for a period of 10 years in Arizona, Massachusetts and New York. Two other individual defendants will be enjoined from making the types of misrepresentations alleged in the complaint: Jeffrey Smith, the company's chief operating officer at the time of its bankruptcy, who was responsible for the company's marketing efforts, and Patty Sullivan, a vice president responsible for the "Track" training.
Lockyer urged consumers to be wary of unscrupulous and abusive practices that exist in the mortgage industry. "To avoid entering into a harmful home mortgage loan, borrowers must be careful to review the terms of their loans and all the documents provided by the lender, especially the Federal Truth-In-Lending Disclosure Statement and the HUD Settlement Statement," Lockyer said. "Consumers should shop around, ask questions, and talk to friends, neighbors and trusted advisors before entering into any new mortgage arrangements."
The settlement was obtained through the joint effort of Lockyer and the attorneys general of Arizona, Florida, Illinois and Massachusetts; the FTC; New York State Banking Department; the Association of American Retired Persons; and attorneys representing private and class-action plaintiffs. A copy of the proposed settlements are available at the FTC's web site. For additional information or to file consumer complaints, California residents may contact the California Attorney General's Public Inquiry Unit at http://www.ag.ca.gov/consumers or by calling (800) 952-5225.