The Federal Trade Commission announced Thursday that it had reached a settlement with a bankrupt California subprime lender, First Alliance Mortgage Co., that could return as much as $60 million to borrowers.
The deal, which the FTC announced along with five state attorneys general, the New York State Banking Department, the AARP, and lawyers for aggrieved borrowers, is one of the largest consumer-protection recoveries in FTC history, the commission said.
If a federal district court in Santa Ana, Calif., approves the deal, as many as 18,000 borrowers will be paid $2,500 to $3,300 each.
The message today should be unmistakable: Fraud and deception by subprime lenders will not be tolerated, said FTC Chairman Timothy J. Muris at a press conference to announce the settlement.
The New York State superintendent of banks, Elizabeth McCaul, said the settlement is the largest ever involving a predatory lender. The states Banking Department began investigating First Alliance in 1998, she said.
Its a very significant win for consumers around the country, Ms. McCaul said. It tells lenders that we will not tolerate abusive lending practices and there are going to be very significant financial penalties.
The FTC sued First Alliance and Brian and Sarah Chisick, in October 2000. Mr. Chisick was the companys president and chief executive officer.
Last May a federal district court consolidated the FTCs complaint with complaints that had been filed by the Arizona, California, Florida, Illinois, Massachusetts, and New York attorneys general, the AARP, and other plaintiffs.
The plaintiffs in the consolidated case charged that First Alliance, formerly based in Irvine, Calif., and Mr. Chisick violated federal and state laws in its mortgage lending practices.
Specifically, the plaintiffs said the company misled consumers about loan and origination fees that First Alliance charged, which the suit said typically amounted to 10% to 25% of the loan. The company also misled borrowers about rate and monthly payments on adjustable-rate mortgage loans it offered, the FTC said.
If approved by the California court, the settlement would create a consumer redress fund with the remaining assets of First Alliance and its affiliates, which is now being liquidated in bankruptcy court. The fund would also include payment of $20 million from Mr. Chisick and his wife, who served on the companys board.
The FTC would administer the redress fund through a private contractor and notify consumers of any actions they must take to receive redress.
Despite the dramatic announcement, the FTC deal may not be the last word on litigation related to First Alliance. Lawsuits pending against Lehman Brothers and other financiers of First Alliance could continue, the commission said.
