FTC: Mortgage Brokers Deceptive Claims Tricked Consumers Looking for a Good Rate

The Federal Trade Commission has charged a California mortgage broker that advertised extremely low mortgage rates with violating federal laws. The FTC’s complaint against Chase Financial Funding, Inc. (CFF) and its principals alleges that the company duped consumers with promises of a “3.5% fixed payment 30 year loan” and a “3.5% FIXED PAYMENT” loan. According to the FTC, CFF did not offer any such loan – the loan CFF falsely advertised is actually an adjustable rate mortgage, where the principal balance would increase if consumers made payments at the advertised rates. Even these minimum payment amounts may increase by 7.5 percent each year. On June 1, 2004, a U.S. district court judge entered a stipulated preliminary injunction barring the defendants’ illegal business practices.

The FTC’s complaint alleges that the defendants have sent ads via spam and direct mail promoting “FIXED PAYMENT” loans with rates such as 3.5 percent and 2.95 percent. The defendants’ Web site, www.chaseff.com, also allegedly advertised a “web special” of “3.5% Fixed Payment” loans. Some of the defendants’ advertisements include comparisons of consumers’ “existing payment” to a “new loan payment,” calculating the “existing” amount using public records of consumers’ current loan amounts. These ads also include a calculation of “annual cash savings.”

The FTC charges that the loans CFF advertises are actually adjustable rate mortgages featuring four payment options, including an interest-only payment option and a lower minimum payment option where unpaid interest is deferred. According to the FTC, the minimum payment amount for the first year of the loan has been, at certain points, the amount that would be due if the consumer truly had a 3.5 percent or 2.95 percent 30-year loan, although the actual interest rate is in fact considerably higher and varies monthly. Each month any unpaid interest is added to the principal of the loan, so that the principal balance increases rather than decreases for periods during the course of the loan. According to the FTC, even the minimum payment amount is subject to increase annually.

The FTC further alleges that, in numerous instances, CFF had consumers sign applications for loans that were not actually offered or available. CFF also has provided consumers with disclosure statements that allegedly misrepresent the annual percentage rate (APR) and the payment schedule for the loan. In addition, the FTC charges that CFF misled consumers during the course of refinancing, including regarding prepayment penalties and fees associated with refinancing for a second time through CFF.

The FTC alleges that the defendants violated the FTC Act by deceptively claiming that they offered: (1) a fixed interest rate or fixed payment loan; (2) a loan in which payment of the minimum amount specified covers both interest and principal; (3) a loan with a specific payment schedule, interest rate, and/or APR; and (4) a loan with no prepayment penalty or with a prepayment penalty that would not apply if the loan was subsequently refinanced through CFF.

The FTC complaint also alleges that defendants misrepresented the “annual cash savings” that consumers would receive if they refinanced through CFF. In addition, the FTC alleges that the defendants failed to disclose or to disclose adequately that monthly payment of the specified amount would result in negative amortization and cause an increase in the total debt for periods during the course of the loan.

The FTC further alleges that the defendants violated the advertising requirements of the Truth-in-Lending Act and its implementing Regulation Z by: (1) advertising credit terms other than the terms that actually are or will be arranged or offered by the creditor; (2) stating a rate of finance charge without clearly and conspicuously disclosing the APR or the fact that the APR may increase after consummation; (3) advertising a “payment rate” without making other required disclosures; and (4) failing to disclose the terms of repayment or the APR when required to do so.

The FTC’s complaint names as defendants Chase Financial Funding, Inc.; James F. Berry; Suzanne Admire; and Jeremy Alexander. The Commission has asked the Court to bar the defendants permanently from engaging in deceptive lending practices, and to award relief, including consumer redress and disgorgement of the defendants’ ill-gotten gains.

The Commission vote authorizing staff to file the complaint was 5-0. The complaint was filed in the U.S. District Court for the Central District of California on May 12, 2004.

Due to a separate trademark action brought by private parties against CFF and Mr. Berry, CFF is now doing business under the name "Choice Financial Funding."

NOTE: The Commission files 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 has actually violated the law. The case will be decided by the court.

Copies of the Commission’s complaint 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. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish (bilingual counselors are available to take complaints), or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC File No. 022-3287)
(Civil Action No. SACV04-549-GLT (ANx))