| DEBRA A. VALENTINE General Counsel Federal Trade Commission BONNIE S. KARTZMAN KENNETH H. ABBE ATTORNEYS FOR PLAINTIFF UNITED STATES DISTRICT COURT FEDERAL TRADE COMMISSION, Plaintiff, v. FIRST ALLIANCE MORTGAGE COMPANY, a California corporation, FIRST ALLIANCE CORPORATION, a Delaware corporation, and FIRST ALLIANCE MORTGAGE COMPANY, a Minnesota corporation, Defendants. CIVIL NO. SACV 00-964 DOC (EEx) COMPLAINT FOR PERMANENT INJUNCTIVE AND OTHER EQUITABLE RELIEF Plaintiff, the Federal Trade Commission ("Commission"), by its undersigned attorneys, alleges as follows: JURISDICTION AND VENUE 1. This is an action under Sections 5(a) and 13(b) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 45(a) and 53(b), to secure permanent injunctive relief and other equitable relief, including rescission, reformation, redress and disgorgement, against defendants for engaging in unfair or deceptive acts or practices in violation of Section 5(a) of the FTC Act, as amended, 15 U.S.C. § 45(a), and acts or practices in violation of the Truth in Lending Act's ("TILA") implementing Regulation Z, 12 C.F.R. § 226, as amended. 2. This Court has subject matter jurisdiction over this matter pursuant to 15 U.S.C. §§ 45(a), 53(b), 1607(c), and 28 U.S.C. §§ 1331, 1337(a) and 1345. 3. Venue is proper in the United States District Court for the Central District of California under 28 U.S.C. §§ 1391(b) and (c), and 15 U.S.C. § 53(b). PARTIES 4. Plaintiff, the Commission, is an independent agency of the United States Government created and given statutory authority and responsibility by the FTC Act, as amended, 15 U.S.C. §§ 41-58. The Commission is charged with enforcing Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices in or affecting commerce, and Section 108(c) of the TILA, 15 U.S.C. § 1607(c). The Commission is authorized by Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), to initiate federal district court proceedings to enjoin violations of the FTC Act and to secure such equitable relief as may be appropriate in each case including, but not limited to, redress and disgorgement. 5. First Alliance Mortgage Company is a California corporation with its principal place of business at 17305 Von Karman Avenue in Irvine, California ("FAMCO"). FAMCO transacts business in this District. 6. First Alliance Corporation ("FACO") is a publicly traded Delaware corporation with its principal place of business at 17305 Von Karman Avenue in Irvine, California. FACO has a one hundred percent ownership interest in FAMCO. FACO transacts business in this District. 7. In July of 1997, FAMCO created a wholly-owned subsidiary Minnesota corporation of the same name, First Alliance Mortgage Company ("FAMCO-MN"). FAMCO-MN has its principal place of business at 7900 Xerxes Avenue in Bloomington, Minnesota. FAMCO-MN transacts business in this District. 8. On March 23, 2000, FAMCO, FACO and FAMCO-MN each filed a voluntary petition for Chapter 11 bankruptcy in the United States Bankruptcy Court, Central District of California, Case Nos. SA 00-12370-LR, SA 00-12371-LR and SA 00-12372-LR, respectively. 9. The foregoing defendant corporations operate together as part of a common enterprise (hereinafter, "First Alliance"). 10. First Alliance has disseminated advertisements to the public that promote consumer credit transactions, as the terms "advertisement" and "consumer credit," are defined in Section 226.2 of Regulation Z, 12 C.F.R. § 226.2, as amended. 11. First Alliance is a "creditor" offering and extending "closed-end credit," as those terms are defined in Section 226.2 of Regulation Z, 12 C.F.R. § 226.2, as amended, and therefore is required to comply with applicable provisions in Regulation Z. FIRST ALLIANCE'S BUSINESS PRACTICES 12. First Alliance advertises, offers, extends and sells home equity loans. These loans are primarily secured by first mortgages on consumers' homes. 13. First Alliance styles itself a niche lender catering to the "subprime" loan market. Its customers include homeowners with poor or insufficient credit histories, records, or ratings who might experience difficulty securing conventional home equity financing. 14. First Alliance charges consumers substantial prepaid finance charges, such as loan origination fees, underwriting fees, loan processing fees and other fees. These charges typically total between ten and twenty-five percent of the amount financed. 15. First Alliance solicits prospective customers for its products and services through telemarketing and direct mail advertising. As part of its marketing campaign, First Alliance targets financially vulnerable consumers including elderly persons and individuals who have significant equity in their homes. In its solicitations, First Alliance states that the consumer has been "pre-qualified to receive up to" some amount of money, such as $82,500. See Exhibits 1 through 3. These solicitations tout the benefits of obtaining a First Alliance loan, such as "NO APPLICATION FEES," "NO UP-FRONT APPRAISAL FEES," "LOW RATES" and "LOW PAYMENTS." See Exhibits 1 through 3. Other solicitations state that one of the benefits of a First Alliance loan is that there are "NO OUT-OF-POCKET EXPENSES." See Exhibits 1 and 3. A certain solicitation offers consumers benefits relative to their current loans, such as "Lower Interest Rates," "Lower Monthly Payments" and "Tax Savings Benefits." See Exhibit 2. One solicitation states that consumers will "SAVE HUNDREDS OF DOLLARS" and "SAVE $500" by refinancing their debt with First Alliance. See Exhibit 3. Sales Presentation 16. First Alliance requires its loan officers to attend an intensive training course where they are taught to memorize and deliver First Alliance's lengthy sales presentation, known as "the Track." The Track presentation consists of thirteen steps and usually takes more than two hours to present to consumers. 17. The Track presentation contains false or misleading statements that cause consumers to be deceived about the material terms of the loan, and misleads consumers about the meaning of the material information used in the TILA disclosure as required by Section 128 of the TILA, 15 U.S.C § 1638, and Section 226.18 of Regulation Z, 12 C.F.R. § 226.18, ("TILA disclosure statement"). For example, one of the material disclosures that is deceptively used by First Alliance is the "amount financed" for the loan. First Alliance misrepresents that the amount financed, appearing on the TILA disclosure statement, is the total amount of money that consumers borrow. In fact, the total amount that consumers borrow, and upon which interest accrues, is the amount financed plus the substantial prepaid finance charges imposed by First Alliance. 18. First Alliance also misleads consumers about costs and fees, such as the existence and amount of loan origination fees. Such misrepresentations obscure the existence of these costs and fees and misrepresent the true amount of debt consumers will incur. 19. In addition, First Alliance loan officers are trained to, and do, mislead consumers by stating or implying that the total cost of credit for the loan is the interest rate displayed on the loan note and mortgage and not the "annual percentage rate" ("APR") displayed on the TILA disclosure statement. In fact, the APR, and not the interest rate on the loan, measures the total cost of credit, and for this reason is an important indicator to consumers that the lender is including substantial prepaid charges. Adjustable Rate Mortgage Loans 20. The majority of First Alliance's borrowers obtain an adjustable rate mortgage ("ARM") based on a six-month U.S. dollar "LIBOR" index, which is the acronym for the London InterBank Offered Rate. 21. The terms of the ARM loans include short-term front-end "teaser" interest rates. The teaser interest rate only applies for the first six months of the loan (the "teaser period"). The teaser rate is then phased out through several rate increases, until the rate reaches the "fully indexed rate" - the LIBOR index rate plus a fixed number of percentage points (the "margin"). 22. First Alliance misrepresents how the interest rates on its ARM loans adjust over time, falsely representing that adjustments in the interest rates are based on changes in the LIBOR index. In fact, the interest rate on these loans can, and does, increase as much as one percentage point at every six month adjustment period until the "artificial discount" (the difference between the teaser interest rate and the LIBOR index plus the margin) disappears. This results in higher interest rates and higher monthly payments for consumers. 23. The acts and practices of First Alliance alleged in this Complaint have been in or affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C. § 44. FEDERAL TRADE COMMISSION ACT VIOLATIONS Count I: Failure to Substantiate Cost Savings 24. Plaintiff incorporates by reference all the foregoing paragraphs. 25. In the course and conduct of offering and extending credit, and in credit advertisements, including but not necessarily limited to Exhibit 3, First Alliance has represented, expressly or by implication, that consumers will save money when consolidating debts. First Alliance did not possess and rely upon a reasonable basis that substantiates the representation at the time it was made. 26. First Alliance's practices constitute deceptive acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). Count II: Misrepresentation of the Terms of the ARM Loans 27. Plaintiff incorporates by reference all the foregoing paragraphs. 28. In the course and conduct of offering and extending credit, First Alliance has represented, expressly or by implication, that adjustments in the interest rate on its ARM loans are based entirely on changes in the LIBOR index and that, over the course of the loan, the interest rate can be lower than the initial teaser rate. 29. In truth and in fact, adjustments in the interest rate on First Alliance's ARM loans are not based entirely on changes in the LIBOR index, and over the course of the loan the interest rate cannot be lower than the initial teaser rate. The initial teaser interest rate automatically increases as much as one percentage point every six months until the artificial discount disappears, and the lowest the interest rate can be is the initial teaser interest rate, regardless of any decrease in the LIBOR index. Therefore, First Alliance's representation as alleged in paragraph 28, was, and is, false or misleading. 30. First Alliance's practices constitute deceptive acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). Count III: Misrepresentation of the Monthly Payments 31. Plaintiff incorporates by reference all the foregoing paragraphs. 32. In the course and conduct of offering and extending credit, First Alliance has represented, expressly or by implication, that the initial monthly payment on its ARM loans will not increase unless the LIBOR index increases. 33. In truth and in fact, the initial monthly payment on First Alliance's ARM loans will increase even if the LIBOR index does not. The initial monthly payment will increase at every six-month adjustment period until the artificial discount disappears, regardless of whether the LIBOR index increases. Therefore, First Alliance's representation as alleged in paragraph 32, was, and is, false or misleading. 34. First Alliance's practices constitute deceptive acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). Count IV: Misrepresentation of Costs and Fees 35. Plaintiff incorporates by reference all the foregoing paragraphs. 36. In the course and conduct of offering and extending credit, First Alliance has represented, expressly or by implication, that consumers can obtain a loan without costs or fees. 37. In truth and in fact, most consumers cannot obtain a loan without costs or fees. First Alliance imposes substantial closing costs and loan fees on the vast majority, if not all, of its loans. Therefore, First Alliance's representation as alleged in paragraph 36, was, and is, false or misleading. 38. First Alliance's practices constitute deceptive acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). Count V: Misrepresentation of the Amount Borrowed 39. Plaintiff incorporates by reference all the foregoing paragraphs. 40. In the course and conduct of offering and extending credit, First Alliance has represented, expressly or by implication, that the total amount that consumers borrow on its loans, and upon which interest accrues, is the amount financed, which appears on the TILA disclosure statement. 41. In truth and in fact, the total amount that consumers borrow on its loans, and upon which interest accrues, is not only the amount financed but includes substantial additional fees and charges imposed by First Alliance, upon which interest will accrue. Therefore, First Alliance's representation as alleged in paragraph 40, was, and is, false or misleading. 42. First Alliance's practices constitute deceptive acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). Count VI: Misrepresentation of the Prepaid Finance Charges 43. Plaintiff incorporates by reference all the foregoing paragraphs. 44. In the course and conduct of offering and extending credit, First Alliance has represented, expressly or by implication, that its prepaid finance charges, such as the loan origination fees, are part of the interest payments on the loan. 45. In truth and in fact, the prepaid finance charges imposed by First Alliance are not part of the interest payments on the loan. These charges are added to the amount financed and are part of the loan principal, or the total amount of money borrowed, and interest accrues on these charges. Therefore, First Alliance's representation as alleged in paragraph 44, was, and is, false or misleading. 46. First Alliance's practices constitute deceptive acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). REGULATION Z VIOLATIONS Count VII 47. Plaintiff incorporates by reference all the foregoing paragraphs. 48. In the course and conduct of offering and extending credit, First Alliance has failed to provide borrowers who have loans (a) with a term greater than one year, (b) secured by the borrowers' principal dwelling, and (c) for which the APR may increase after consummation, with the booklet titled Consumer Handbook on Adjustable Rate Mortgages or a suitable substitute. First Alliance has, therefore, violated the requirements of TILA's implementing Regulation Z, 12 C.F.R. § 226.19(b)(1). CONSUMER INJURY 49. Consumers have suffered, and will continue to suffer, substantial injury as a result of First Alliance's violations of § 5(a) of the FTC Act, 15 U.S.C. § 45(a), and TILA's implementing Regulation Z, 12 C.F.R. § 226, as set forth above. PRAYER FOR RELIEF WHEREFORE, plaintiff requests that this Court, as authorized in § 13(b) of the FTC Act, 15 U.S.C. § 53(b), Section 108(c) of the TILA, 15 U.S.C. § 1607(c), and pursuant to its own equitable powers:
Dated: , 2000 Respectfully Submitted, DEBRA A. VALENTINE BONNIE S. KARTZMAN KENNETH H. ABBE ATTORNEYS FOR PLAINTIFF |