Sub-prime Lender Agrees to Settle FTC Charges of Violating Federal Lending and Consumer Protection Laws

Nu West, Inc., a Bellevue, Washington-based lender, and company owner Georg Frey, have agreed to settle Federal Trade Commission charges that they violated the Home Ownership and Equity Protection Act (HOEPA), the Truth in Lending Act (TILA), and the FTC Act when making high-cost loans to consumers that were secured by their homes. According to the FTC, "subprime" lenders generally extend credit to higher-risk consumers and charge significantly higher rates and fees than lenders charge borrowers who obtain "prime" loans. The FTC's complaint alleges that the defendants violated HOEPA by failing to disclose to consumers material costs of the loans and other information at least three days before the closing; by including prohibited balloon payments and increased interest rate provisions in the notes, and by making direct payments to home improvement contractors. The settlement prohibits the defendants from violating any provisions of the TILA, HOEPA, and the FTC Act and would require them to pay more than $160,000 in consumer redress.

"Deceptive lending tactics, like hiding essential information from borrowers, puts home ownership and home equity at risk," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "Consumers put their hopes and dreams into their homes, and laws like HOEPA are on the books to protect them."

Congress passed the Home Ownership and Equity Protection Act to prevent certain predatory lending practices. HOEPA amended the TILA and provides special protections for consumers in certain refinancings with high-cost loans secured by their homes. In loans covered by HOEPA, the lender must give the borrower certain disclosures in writing at least three business days before closing. This information includes a notice that the consumer could lose his/her home and any money put into it if he/she does not meet his/her obligations under the loan. The notice also requires disclosure of the annual percentage rate, amount of payments and, if applicable, certain variable rate information. The law also bans from high-rate, high-fee loans such terms as balloon payments due in less than five years, increasing the interest rate at default, and most prepayment penalties. Lenders also are prohibited from engaging in a pattern or practice of lending based on home equity without regard to consumers' ability to repay loans ("asset-based lending") and making direct payments to home improvement contractors. Other TILA provisions require disclosure of key credit terms and give consumers three days to rescind after they sign loan documents.

The FTC's complaint alleges that Nu West and Frey, in the course of making "HOEPA" loans, violated HOEPA by failing to disclose the material costs of the loans and other information at least three days before closing; including in the loan notes prohibited balloon payments and increased interest rate provisions, and by making direct payments to home improvement contractors. In addition, the FTC charged the defendants with violating the TILA by understating the Annual Percentage Rate (APR), understating the finance charges in the required TILA disclosures; failing to give consumers rescission notices, and by disbursing loan funds to those consumers before the expiration of the rescission period.

Further, the complaint charges that the defendants violated Section 5 of the FTC Act by failing to disclose, or accurately disclose, material credit information - key credit terms and costs such as APR's and balloon payments, and information concerning the right to rescind.

Finally, the complaint alleges that the defendants directed borrowers to falsely characterize consumer loans as business loans, in an apparent attempt to evade HOEPA and the TILA, in violation of the FTC Act.

The proposed settlement would prohibit future HOEPA and TILA violations, as well as related FTC Act violations, including but not limited to the specific violations alleged in the complaint, and would require the defendants to pay more than $160,000 in consumer redress.

Further, the proposed settlement would require the defendants, for each HOEPA loan that they still wholly or partially own, to reform the note or contract by nullifying loan terms that HOEPA prohibits. These include prohibited balloon payment, increased interest rate, and/or prepayment penalty provisions.

The settlement also contains a number of recordkeeping and reporting requirements to assist the FTC in monitoring compliance with its terms.

The Commission vote authorizing the filing of the complaint and proposed settlement was 5-0. The documents were filed in the U.S. District Court, Western District of Washington, in Seattle, on July 17. The FTC's Northwest Region in Seattle handled this matter.

NOTE: The stipulated final judgment and order is for settlement purposes only and does not constitute an admission by the defendants of a law violation. The judgment has the force of law when signed by the judge.

The FTC has prepared a Consumer Alert, titled "Need a Loan? Think Twice About Using Your Home as Collateral," which advises consumers on ways to protect their homes and equity. The Commission also has available a Fact Sheet for consumers, titled "High-Rate, High-Fee Loans," which explains additional consumer rights under HOEPA where a home equity, second mortgage, or refinance loan is secured by a consumer's principal residence and the loan's annual percentage rate exceeds by more than 10 percent the rate on a Treasury note of comparable maturity, or total fees and points exceed 8 percent of the "total loan amount."

Copies of the complaint and proposed settlement, and the consumer brochure are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; toll-free: 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(Civil Action No.: C00-1197)
(FTC File No. 982 3624)