An Irvine lender's settlement of charges that it systematically cheated 18,000 home equity borrowers will result in refunds of $60million--the largest punishment for "predatory" home loan practices in history, consumer protection officials said Thursday.
The settlement comes in the October 2000 lawsuit filed against First Alliance Corp. by the Federal Trade Commission, a suit later joined by California and five other states. It requires company founder Brian Chisick to contribute $20million to a restitution fund. Assets of First Alliance, which is being liquidated in bankruptcy proceedings, will provide the balance of the settlement.
Chisick, who owns 80% of First Alliance, neither admitted nor denied wrongdoing.
First Alliance shares closed unchanged Thursday at 12 cents in over-the-counter trading.
Many First Alliance borrowers were elderly people targeted for sales pitches because they had considerable home equity and needed to repay other debts.
According to a barrage of private and government lawsuits, including one by the AARP, First Alliance salespeople misled borrowers into thinking they would pay no origination fees when in fact those fees added 10% to 24% to the loan amount. In addition, borrowers allegedly weren't told the initial rates on adjustable-rate loans would quickly rise.
"There was actually a training school set up by this company, where they instructed personnel in how to rip people off," California Atty. Gen. Bill Lockyer said. "They targeted the elderly with sales promotions to find those who might be willing to risk their most precious asset--their home--in exchange for some quick cash."
The settlement covers 18,000 borrowers as far back as 1992. The estimated $60-million repayment fund translates into an average of $3,300 each--less than one-third the average origination fee borrowers paid on a typical First Alliance loan, said Joel Winston, a top financial-practices supervisor at the FTC.
The borrowers potentially have another source of recovery--First Alliance's Wall Street bankers, who funded the mortgages and bundled them for sale as securities.
Those roles are attacked in a racketeering lawsuit filed by attorney Richard F. Scruggs, who helped obtain multibillion-dollar settlements with tobacco companies, and law firm Milberg Weiss Bershad Hynes & Lerach, known for accusing companies and executives of misleading investors.
That lawsuit names as defendants Lehman Bros. Inc., Prudential Securities Group Inc. and the securities operation of First Union National Bank. It contends First Alliance's lenders not only knew of its predatory practices, but encouraged them--an accusation the lenders strongly deny.
That litigation will be closely watched by the industry that generates asset-backed securities--bonds backed by payments on mortgages, credit cards, car loans and other revenue streams. It is a booming business for Wall Street, with more than $1.28 trillion of asset-backed securities trading.
Much of the attention has focused on memos by a Lehman Bros. executive who wrote of First Alliance: "It is a requirement to leave your ethics at the door."
Lehman Bros. spokesman William Ahearn, who has denied wrongdoing, didn't return a phone call Thursday, and Lehman Bros. attorneys couldn't be reached.
First Alliance's general counsel, Jerry A. Hager, said the company is "pleased to have reached a resolution" of the case.
Chisick's lawyer, Ronald Rus, said his client is "relieved that it's over" and pleased the "orderly liquidation of the company will take place."
Chisick and his wife, Sarah, agreed to be banned from the mortgage origination business in the states involved in the settlement, and to tighten limits on engaging in the activity elsewhere, FTC Chairman Timothy J. Muris said.