Predatory Lending Practices Result in Large Settlement

The Federal Trade Commission, in a press conference March 21, 2001, announced the details of a settlement entered into with First Alliance Mortgage Co. headquartered in California that could return as much as $60 million to consumers who were victims of what the FTC referred to as a "subprime lending scheme." Since 1998, FTC has brought 15 cases against subprime lenders.

Here are the highlights we gleaned from the press conference. Additional details will be posted on the FTC's site within a few days:

The FTC was joined by Attorneys General and the AARP from several states in announcing this settlement;
First Alliance Mortgage Co. (FAMC) was, according to the FTC, a major subprime lender with 18,000 customers. It is currently in bankruptcy;
One issue was with loan origination fees. FAMC represented there would be no fees but charged fees and points amounting to 10-25%;
Interest rates also increased without notice to customers;
The California Attorney General says the company essentially set up a "training school" to show sales people how to rip off customers;
Customers were told they had fixed rate mortgages when, in fact, they had adjustable rate mortgages that increased 1% every 6 months;
The company charged origination fees of as much as 25%;
AARP filled suit against them in California in 1998. AARP has mounted an education campaign against predatory lending currently in 25 states;
Consumers need to read documents and know what they are getting into, but in this case consumers were being targeted and were being lied to.
Arizona Attorney General Janet Napolitano noted there were 600 victims in Arizona. She said loans were made by FAMC with full knowledge that borrowers did not have the ability to repay.
The chairman of the FTC said even if the terms of the contract contained the correct information, customers should be able to reply upon the oral representations made by representatives of the lender;
The Florida Attorney General pointed out that many elderly customers cannot read the small print and must reply on the representations of the salespersons.
The average return to customers will be $2,500 - $3,300;
The principal of FAMC is barred from getting back into this business;
$20 million of the settlement will be coming from principals. Some money will be from proceeds of insurance policies held by the company.
FTC will post information on its Web site regarding claims.