Irvine Loan Firm Files for Bankruptcy

Amid a growing national debate over predatory mortgage lending, beleaguered First Alliance Corp. abruptly filed for bankruptcy Thursday and said it would go out of business.

The Irvine home loan company had become a lightning rod for protests against the sub-prime mortgage industry, which specializes in making loans to low-income homeowners and borrowers with poor credit.

The mounting pressure from grass-roots organizations, media reports and state and federal officials was capped Wednesday by Federal Reserve Board Chairman Alan Greenspan, who warned that “abusive” practices are hurting the poor.

First Alliance’s unexpected capitulation could portend a new round of legal and financial woes for the nation’s $150-billion sub-prime mortgage lending industry. Wall Street also has come under fire for providing financial support for such companies, and analysts say such backing could further decline.

Consumer groups and regulators have long criticized the industry, particularly First Alliance, for allegedly gouging borrowers with high fees and interest rates and taking advantage of seniors and minority homeowners.

First Alliance has repeatedly defended its practice, saying it made loans to borrowers that other lenders turned away, such as people who have filed for bankruptcy or who have no steady income.

The company’s petition filed in U.S. Bankruptcy Court in Santa Ana capped a tumultuous 29-year history of regulatory clashes, ups and downs on Wall Street and lawsuits filed by unhappy borrowers.

But despite the headaches and a 90% stock price decline since 1998, it has nevertheless been a stunningly profitable journey for First Alliance Chairman Brian Chisick and his family, who have pocketed nearly $140 million through well-timed stock sales over the past four years.

Chisick, 60, could not be reached for comment Thursday.

First Alliance, which funded about 5,000 loans totaling $483 million last year, said Thursday that it has closed its 24 offices in 10 states and will no longer make new loans.

Trapped by the company’s sudden bankruptcy filing are hundreds of would-be borrowers, whose loan applications are awaiting approval and who now must look for other lenders. Any loan contract that was not signed by Wednesday will be canceled; loans in the pipeline will be funded through March 31, said Francisco Nebot, the company’s president.

About 325 employees nationwide were laid off, including 250 at the company’s Irvine headquarters. The company’s stock trading was halted early Thursday at $1.81 a share.

Nebot blamed the bankruptcy on recent negative publicity, fear of additional lawsuits and pending state and federal legislation that would cap the loan fees that First Alliance and others charge their customers.

“All this is making the business unprofitable,” Nebot said. “We spent $7 million last year just defending ourselves.”

Nebot complained that First Alliance had been unfairly attacked because of its high loan fees, which are typically 10% to 15% of the loan amount--compared to 3% to 5% for some other sub-prime lenders and about 1% for borrowers with good credit.

For several years, consumer groups and state regulators also have accused First Alliance of using high-pressure sales tactics, preying on low-income and minority homeowners and hiding its fees.

“First Alliance is a menace,” said John Jackson, a spokesman for the Assn. of Community Organizations for Reform Now, which has been picketing sub-prime lenders for several months. “I’m sorry for the hard-working people who worked at the company, but First Alliance needed to be stamped out.”

ACORN and other consumer groups are supporting legislation in several states that would mandate such protections as consumer education for borrowers and limits on loan fees of 3% to 5% of the total amount.

Greenspan’s comments capped intensified pressure on First Alliance over the past two weeks. On Tuesday, Comptroller of the Currency John D. Hawke Jr. also decried predatory lending practices. Last week, The New York Times and ABC News’ “20/20” program ran joint stories on the allegations against First Alliance.

Fearing the media reports would spur a new wave of lawsuits on top of pending legal actions by a number of states and customers, First Alliance’s board decided earlier this week to shut down while the company still had some assets.

“The goal now is to liquidate the company as fast as possible,” Nebot said.

The company has been profitable for years, though growth has been slowing. According to recent financial filings, the company has about $150 million in assets, including about $13 million in cash and $75 million in capital.

The negative publicity also threatened First Alliance’s $100-million line of credit from Lehman Bros., the New York investment bank that found itself drawn into much of the controversy recently. Lehman, which had become First Alliance’s primary source of financing, had the contractual right to cut off funding if the bank received adverse publicity.

But officials at First Alliance and Lehman both denied reports that the credit line had been terminated.

Nevertheless, analysts predict that Lehman and other Wall Street firms that provide financial support to sub-prime lenders will likely continue to back away from the industry, a step they began to take two years ago amid concerns over accounting irregularities and the risky nature of sub-prime loans.

That could pose future financial problems for other sub-prime lenders, including Ameriquest Mortgage Corp. in Orange, Aames Financial Corp in Los Angeles and Associates First Capital Corp. in Irving, Texas, analysts said.

Officials at Ameriquest, which has also found itself under attack by consumer groups, quickly distanced themselves Thursday from First Alliance’s problems and stressed they foresee no negative impact on their company.

“If you’re running a clean company, there is nothing to worry about,” said Mitchell Rosenberg, Ameriquest’s executive vice president.

It was unknown how First Alliance’s bankruptcy filing will affect several pending lawsuits, including one by the American Assn. of Retired Persons and another by company stockholders.

Shareholders are particularly upset by the Chisicks’ stock sale in 1997 when the family sold about $90 million of its personal holdings just as the price was trading near all-time highs of $18 a share, adjusted for a stock split. About two months later, the stock price began falling and never recovered.

The U.S. Department of Justice and five states also have been investigating First Alliance for about two years. In light of the company’s exit from the business, observers speculated that some of the government agencies would drop their actions. A representative from one state, Washington, said it is considering making a claim in the bankruptcy case.

Some industry leaders said Thursday they worried that First Alliance’s problems might lead legislators to pass overly restrictive new laws that might drive companies out of the business.

“Not everyone in the industry is gouging,” said Jack Mayesh, who heads Long Beach Financial Corp. in Orange, a unit of Washington Mutual Inc.

“It’s important not to drive out the good lenders who price [fairly] and are going into neighborhoods that the government has been trying to get lenders to go into.”

* UNDER PRESSURE

Founder’s confidence he could handle legal problems gave way after a TV news report. C1

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First Alliance’s Fall

Though still profitable, Irvine-based First Alliance has seen its profit and loan volume drop. The lender’s stock price is down 90% over the past two years, culminating Thursday with the company’s bankruptcy filing.

NET INCOME (All figures in millions):

‘94: $9

‘99: $3.8

TOTAL LOANS

‘94: $313.7

‘99: $483

STOCK PRICE

Jan. ‘97: $19.83

Mar. ‘00: $1.81

Chronology: First Alliance

1971

* Brian and Sarah Chisick found First Alliance Mortgage Co. in Orange County. 1988

* First Alliance flourishes after state repeals laws limiting interest rates.

1989

* Firm pays $420,000 to settle state lawsuit accusing it of imposing higher fees on homeowners in minority neighborhoods.

1994

* Firm pays $6.85 million to settle consumer class-action suit.

1996

* First Alliance goes public.

1997

* Borrowers file fraud lawsuits accusing firm of deceptive practices. American Assn. of Retired Persons joins suit.

1998

* Officials in various states conduct probes, file legal actions against First Alliance.

1999

* February: State appeals court in San Jose criticizes company; rules that a fraud case can go to trial.

* April: First-quarter earnings down 73%.

* May: Second-quarter earnings fail to meet earlier estimates. Stock price slumps 80% by the end of the year.

* June: Shareholder files suit alleging First Alliance sold its stock at inflated price.

* September: Firm pays $550,000 to settle Minnesota consumer fraud complaint.

* December: Firm closes five of its 29 retail branches.

2000

* February: Company settles San Jose case.

* March 23: First Alliance shuts down, dismisses 85% of its employees and files for bankruptcy with plans to liquidate the company.

JANICE JONES DODDS/Los Angeles Times