The Illinois attorney general has filed suit against a California-based national mortgage lender for allegedly cheating homeowners in a type of predatory scam reported in Real Times just two weeks ago.

First Alliance Mortgage Company, d/b/a First Alliance Credit Corporation, Irvine, Calif., is charged with violating the Illinois Consumer Fraud and Deceptive Business Practices Act and the Illinois Interest Act for allegedly operating a home-equity stripping scheme. First Alliance has 34 retail branch offices, including 31 in the United States and three in the United Kingdom. The company operates two branches in Illinois at 3800 N. Wilke Rd., Arlington Heights, and Two Mid America Plaza, Oakbrook.

This is the second lawsuit brought by a state attorney general against First Alliance. Minnesota's AG, Hubert Humphrey III has also filed suit on behalf of about 100 Minnesotans on the same charges.

Home-equity stripping is a burgeoning lending practice used to steal the value from consumers' homes.

Equity thieves approach when the homeowner is concerned about his or her investment -- when the owner is behind in his mortgage payments or the home needs expensive repairs. Others lure owners in by promising to reduce debt through debt consolidation or refinancing, said Jeffrey Zeltzer, executive director of the National Home Equity Mortgage Association, a trade association trying to push reforms for the industry

The unscrupulous lender talks a consumer into cashing out the money-value they have built up in their homes with a home-refinance loan. Then, the lender cons the consumer into unwittingly signing away a large portion of the proceeds to outrageous fees that benefit the lender.

``If the allegations are proven, this company and its agents abused the trust Illinois consumers placed in them,'' Ryan said. ``Consumers who refinanced their mortgages were ripped off by a complex plot to steal the equity in their homes.''

Ryan charged that the defendant allegedly used deceptive direct mail and telemarketing to lure consumers who had built up substantial equity in their homes.

"Abusive practices are the exception, not the rule in this industry," Zeltzer said. "However, NHEMA has recognized that there are a few unscrupulous mortgage brokers and lenders who are engaging in improper practices. We are firmly committed to forcing this rogue minority of bad apples to stop such improper practices."

Consumers complained that the defendant promised low interest rates and low monthly payments then used sophisticated and deceptive sales tactics to dupe them. These consumers unwittingly signed loans with thousands of dollars in hidden fees -- sometimes as much as 20 percent of the amount of the loan.

"You either lose your house to foreclosure or end up with payments so high you spend every cent of your income in a desperate struggle to hold onto your home," Zeltzer said.

The home equity lending industry has grown over the last decade into a quarter-trillion dollar segment of the nation's economy. In 1997, the industry originated more than four million home equity loans, totaling $268 billion, most of which consumers recirculated into the economy. The industry operates in all 50 states and employs tens of thousands.

Generally, home equity loan customers have some blemishes on their credit histories and do not meet strict "A" credit standards. As a result, these types of loans are classified as "A-," "B," "C" and sometimes "D" credit grade. Often, home equity loans are referred to as subprime or non-conforming loans.

In the Illinois case, consumers were often charged loan origination fees ranging from $12,000 to $19,950. Defendants allegedly rushed home owners into signing scores of documents without first reading and understanding them.

Many consumers did not receive copies of their documents until after the loans closed. Months later when consumers discovered the true cost of their loans many were forced to refinance again.

For example, one consumer who thought he was signing a refinanced mortgage loan for $118,000 later discovered that the loan processed by First Alliance was for $141,000. This homeowner was charged $19,950 in a hidden loan origination fee. Upon discovery of the fraud, the consumer refinanced with another company. The new loan of $141,000 was financed for less than $2,000.

Ryan is seeking a permanent injunction, revocation of all licenses and certificates that allowed defendant to do business in Illinois, restitution, a civil penalty of $50,000 and an additional penalty of $50,000 per violation committed with the intent to defraud.

AARP and several legal aid organizations recommend the following precautions:

Published: December 2, 1998

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