FTC Charges D.C. Mortgage Lender with Deception and Unfairness Against Borrowers

The Federal Trade Commission yesterday filed a 23-page complaint in U.S. District Court against Capital City Mortgage Corporation, a Washington, D.C.-area mortgage lender, and its owner, Thomas K. Nash, alleging numerous violations of federal law resulting in serious injury to borrowers, including the loss of their homes.

"It is critically important that all Americans, especially those who live in urban areas, have access to capital," Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection, said. "Deceptive mortgage lending is false access because it hides from consumers essential information they need to make decisions about their single greatest asset -- their home -- and the equity they have spent years building. This conduct is particularly devastating because these loans are usually sought at a time of great need and borrowers are most susceptible to predatory practices that can strip consumers of substantial sums of money and ultimately their homes. The Commission brought this action to halt the activities of one enterprise engaging in deceptive mortgage lending in the Washington, D.C. area. But the Commission also took this action to inform the public of the negative consequences of such lending and to state that the Commission will act to halt such activity."

The FTC's complaint alleges that the defendants, Capital City and Nash, violated the FTC Act, which prohibits unfair and deceptive practices, as well as the Truth in Lending Act, the Fair Debt Collection Practices Act, and the Equal Credit Opportunity Act.

The complaint states that the defendants frequently made high interest rate (20 to 24 percent) loans to minority borrowers, elderly persons, or those with fixed or low incomes. The loans often are interest-only balloon loans in which a borrower, after making payments for the term of the loan, still owes the entire amount of the loan principal. These loans are often secured by the borrowers' homes and typically are made based on the worth of the home rather than on a borrower's creditworthiness or income.

The FTC Act

The complaint alleges that, in violation of Section 5 of the FTC Act, the defendants acted with deception and unfairness toward borrowers at the beginning, during, and at the end of the lending relationship. The complaint alleges that the defendants deceived borrowers about various loan terms; for example, by making representations that a loan was an amortizing loan that would be paid off by making payments each month, when in fact, the loan was an interest-only balloon loan in which the entire loan principal amount would be due after all the monthly payments were made. The complaint also alleges that the defendants deceived borrowers during the loan period with phony charges of inflated monthly payment amounts, overdue balances, arrears, service fees, and advances. For example, the complaint asserts that the defendants charged a substantial penalty against a borrower for not having insurance on a property when in fact the borrower had insured the property. Additionally, the complaint alleges that the defendants deceived borrowers regarding amounts owed to pay off the loans; for example, adding phony charges to the loan principal that were disclosed only at pay-off and only after accruing large amounts of interest. Further, the complaint alleges that the defendants violated the FTC Act by withholding some loan proceeds while forcing a borrower to make monthly payments for the entire loan amount, by foreclosing on borrowers who were in compliance with their loan terms, and by failing to release its liens on title to borrowers' homes even after the loans were paid off. The complaint asserts that the defendants' alleged law violations placed borrowers in default and positioned the defendants to foreclose on their property. After foreclosure, the defendants bought the property at auction for a price much lower than the appraised value of the property.

Truth in Lending Act

In its complaint, the FTC states that the defendants failed to comply with numerous provisions of the Truth in Lending Act, a statute specifically designed to provide consumers with accurate disclosures of the true costs of credit. Among other violations, the complaint alleges that the defendants failed to make the required disclosures at all or made disclosures that understated the cost of the credit, such as the annual percentage rate (APR) and the finance charge. In addition, the defendants failed to disclose the correct payments to be paid each month or the total of all payments required to pay off the loan.

Fair Debt Collection Practices Act

The FTC alleges that the defendants violated the Fair Debt Collection Practices Act by representing falsely that letters from its in-house attorney were from a third party collecting a debt, by making false and misleading representations when collecting loan payments, and by engaging in unfair or unconscionable debt collection practices.

Equal Credit Opportunity Act

The FTC's complaint also alleges that the defendants violated the Equal Credit Opportunity Act and its implementing Regulation B, a statute designed to prevent discrimination by lenders. The complaint's allegations include the defendants' failure to take written applications for mortgage loans and to collect legally required information about the applicant's race or national origin, sex, marital status and age. Without this required information, the FTC cannot effectively monitor whether a lender is illegally discriminating in its lending. In addition, the complaint alleges that the defendants failed to give borrowers certain notices when loan applications were rejected or withdrawn, including its principal reasons for denying the application.

In its complaint, the FTC asks the court to award consumer redress, to assess monetary penalties, and to restrain permanently the defendants from violating the law in the future.

The Commission's vote to authorize filing of this complaint was 4-0, with Commissioner Mary L. Azcuenaga not participating. The complaint was filed in U.S. District Court for the District of Columbia on January 29, 1998.

NOTE: The Commission authorizes the filing of a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant actually has violated the law. The case will be decided by the court.

Copies of the complaint, a factsheet about the relevant statutes enforced by the FTC, and consumer education material, including a Consumer Alert, titled "Avoiding Home Equity Scams," is available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-3128; TTY 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.