Attorney General Brings Consumer Protection Action Against Major "subprime" Lender in California
Sues First Alliance Mortgage Company Over Misrepresentations
(LOS ANGELES) – Attorney General Bill Lockyer today announced the filing of a consumer protection lawsuit against a major "subprime" mortgage lender, First Alliance Mortgage Company ("First Alliance"), its parent company, First Alliance Corporation ("FACO"), and their principals Brian Chisick and Patty Sullivan. The complaint alleges that consumers throughout California were lured into expensive mortgages through misrepresentation and unfair and unlawful business practices.
"Our investigation found that First Alliance lied about the material terms of its loans, especially its exorbitant origination fees and escalating monthly payments," Lockyer said. "This unfair business practice placed thousands of California homeowners, many elderly, at risk of losing their homes."
Lockyer said the consumer protection lawsuit filed against First Alliance is part of his ongoing enforcement effort to curb abusive and predatory lending practices in the sub-prime mortgage industry. The lawsuit filed Monday in Los Angeles Superior Court seeks restitution and other equitable relief to victims and an order prohibiting future violations.
First Alliance, based in Irvine, sold approximately 35,000 home equity loans nationwide. Of the 35,000 loans sold, over one-third were sold to residents throughout California, including the counties of Los Angeles, Orange and Alameda. The company offered home equity loans primarily secured by first mortgages on single family residences.
According to the complaint, First Alliance through telemarketing and direct mail soliciations targeted homeowners, many elderly, who had built up significant equity in their homes. First Alliance Loan officers were trained to use a lengthy, 13-step sales presentation known as "the Track" to sell loans. Among other things, the presentations misled consumers about costly loan origination fees, which typically ranged from 10% to 25% of the loan, and the interest rate and monthly payments of their adjustable rate mortgages ("ARM").
ARM loans, which were made to a majority of First Alliance borrowers, included short-term, front-end "teaser" interest rates that applied only for the first six months of the loan. The complaint alleges that First Alliance misrepresented that the initial "teaser" rate would remain constant unless market interest rates increased, when in fact, the interest rate on these loans automatically increased as much as one percentage point every six months, regardless of market conditions.
The complaint further alleges that First Alliance misrepresented that the total amount borrowed on its loans, and upon which interest accrues, is the "amount financed" that appears on the federal Truth in Lending Act disclosure statement. In fact, the "amount financed" does not include the loan origination fees and other fees, such as underwriting fees, loan processing fees and appraisal fees.
The company also allegedly misrepresented that the loan origination and other fees are part of the interest payments on the loan, when in fact, interest itself accrues on these charges. As a result of these practices, the Attorney General alleges, consumers were led to believe they were borrowing less money at lower interest rates than they actually were.
The First Alliance companies filed a bankruptcy reorganization petition which is pending in Federal District Court in Santa Ana.