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First Alliance Says It Faces Federal Inquiry Into Lending

Financial services: Seven states, conducting bias probes, are also scrutinizing Irvine firm.


First Alliance Mortgage Co., an Irvine home-equity lender accused in the past of racial discrimination and defrauding the elderly, said Thursday that federal authorities and seven states are investigating its lending practices.

The lender and its parent company, First Alliance Corp., were named in a letter from the civil rights division of the Justice Department and the state attorneys general. The company said it will cooperate with a request for information and believes it has complied with all state and federal laws.

Other lenders also are targeted in the probe of whether fair housing, fair lending and consumer protection laws have been broken, First Alliance said. It didn't identify them.

Irvine-based First Alliance specializes in "subprime" lending--loans to people with shaky credit histories. Subprime lenders charge higher loan-origination fees and interest rates to offset the extra risk.

Chief Executive Brian Chisick said he believes the company will prevail against the lawsuits.

"Our company has always followed all the state and federal forms for disclosure," he said. "These suits are more for publicity than anything else."

On Thursday, its stock dropped nearly 20%, or 81 cents, to close at $3.56 on Nasdaq, after hitting a 52-week low of $2.38 earlier in the trading session. First Alliance didn't disclose the lawsuits until after the markets closed.

The company has been in trouble before.

In 1989, First Alliance was accused by state securities regulators of systematically refusing to make loans in some black neighborhoods. Without admitting wrongdoing, the company settled the lawsuit by agreeing to pay $436,000 and abide by state fair-lending laws.

In 1994, the lender agreed to pay $6.85 million to settle a class-action suit accusing it of charging inflated and undisclosed loan fees. It admitted no wrongdoing.

First Alliance now is defending itself against a multimillion-dollar string of more recent lawsuits, mostly from Northern California, and which the American Assn. of Retired Persons has joined.

AARP accused the company of using aggressive telephone and mail campaigns to tout low rates to elderly homeowners, then imposing "unconscionable" fees of as much as 15% of the loan amount. The intent was "appropriating the equity in the elders' house," the lawsuit said.

Yet another lawsuit accuses First Alliance of defrauding holders of its stock by failing to disclose pertinent information. The company went public two years ago. Its shares, which were trading at $24.17 a year ago, are now trading in the $3 range.

Stocks of First Alliance and other subprime lenders have been under heavy selling pressure throughout the week, amid concerns on Wall Street that these lenders will find it increasingly difficult to raise more funds.

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