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First Alliance's Liquidation OKd

Courts: Settlement yields $75 million to borrowers and lawyers who say the home-equity lender deceived customers.

September 11, 2002|E. SCOTT RECKARD | TIMES STAFF WRITER

A federal judge approved a liquidation plan Tuesday for First Alliance Corp., putting the finishing touches on a settlement that will yield at least $75 million to borrowers and their lawyers who contended that the Irvine home-equity lender routinely cheated its customers.

The settlement includes $20 million from First Alliance founder Brian Chisick and his wife, Sarah, with the rest coming from the assets of the company. After a $15-million payment to attorneys, the 18,000 borrowers will receive checks totaling at least $60 million. That's an average of $3,300 each, though individual payments will vary widely.

First Alliance, which never admitted wrongdoing, filed for bankruptcy protection in early 2000 amid a wave of lawsuits, high-profile news exposes of its practices and a growing national debate over abuses in sub-prime lending--loans to borrowers with blemished or limited credit histories. In the end, the Federal Trade Commission, AARP Foundation and six states including California joined private plaintiffs in pursuing damages from First Alliance and Chisick.

Joel Winston, a top official in the FTC consumer-protection division, said the settlement is by far the largest the FTC has obtained in a lending case, although a still larger case is pending against Citigroup Inc.

"It should send a message to the rest of the industry," said Winston, noting that First Alliance targeted lower-income and elderly homeowners. "You don't deceive consumers and get a free ride. There's a price to be paid."

AARP had accused First Alliance of luring elderly borrowers across the nation into taking out loans with hidden fees as large as $25,000 for every $100,000 borrowed.

In addition to the settlements approved this week, borrowers also may recoup an undetermined amount from related lawsuits pending in federal court in Santa Ana.

Defendants in those suits include the insurers who carried liability policies for the bankrupt mortgage company and the securities firms that bankrolled First Alliance and sold its loans to investors.

The insurance probably will pay at least $14.5 million, those involved in the case say. Settlements from the securities firms are highly uncertain but could total tens of millions of dollars more.

The latter litigation, a racketeering case filed in April by prominent tobacco and securities-fraud plaintiffs' lawyers, is especially high stakes. It will be closely watched by traders of asset-backed securities--bonds backed by payments on mortgages, credit cards, car loans and other revenue streams.

The defendants in that action are Lehman Bros. Holdings Inc., Prudential Securities and a securities unit of First Union Bank, now part of Wachovia Corp. The firms provided credit lines to First Alliance and helped it sell its loans, packaged as securities, to investors. They have denied wrongdoing but declined to comment Tuesday.

That litigation, scheduled to begin early next year, resembles lawsuits targeting Enron Corp. bankers such as Citigroup and J.P. Morgan Chase & Co., said Brian Nottage of Economy.com.

"Obviously, it will have a chilling effect if it becomes standard that you can sue the securitizers," Nottage said.

U.S. District Judge David O. Carter in Santa Ana, who gave final approval to the First Alliance settlement Monday and to the lender's bankruptcy liquidation plan Tuesday, praised the often contentious group of attorneys for working out a deal favorable to the borrowers.

Chisick's attorney, Ronald Rus, didn't return calls for comment.

Despite the complexity of the litigation, there were no objections to the settlement, and a trustee is expected to take over the company for final liquidation next month. Checks may start going out to First Alliance borrowers by early next year, attorneys said.

First Alliance general counsel Jerry Hager said that holders of the 3.5 million First Alliance shares still in public hands will receive $1.50 for each share or what they paid for the stock, whichever is lower.

The stock, which once traded in the $20 range, was just above $2 a share when First Alliance tumbled into bankruptcy.

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