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State Says Orange County Lender ‘Redlined’ Blacks

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Times Staff Writer

The state Wednesday sued to revoke the licenses of First Alliance Mortgage Co. of Orange for alleged racial discrimination in lending, charging that the firm used a list of ZIP codes entitled “Never Never Land” to screen out loan applicants in predominantly black neighborhoods.

Accusing the second mortgage broker of “a pattern of discrimination over a period of years,” the California Department of Corporations said the practices largely involved South-Central Los Angeles, parts of the San Francisco Bay Area and San Diego.

Among other things, the suit alleged that First Alliance used census tract information to pinpoint areas that were not in “Never Never Land” but were more than 30% black, and that in such areas it charged significantly higher interest rates and imposed other stringent conditions for the loans it did make.

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The civil suit was filed in Los Angeles County Superior Court. A hearing is set for today on a motion by attorneys for the state to appoint a receiver to take over First Alliance’s affairs.

The suit also asks the court to force the defendants to “disgorge” various fees and to order restitution to borrowers and investors.

Seven Branches Statewide

The Corporations Department said its action is believed to be the first use of the state’s 11-year-old Holden Act outlawing so-called redlining practices. The law covers racially discriminatory real estate lending by certain types of lenders but does not include banks and savings and loans.

“Our action,” said Commissioner of Corporations Christine Bender, “is intended to make a strong statement that the state will not tolerate redlining by financial services institutions subject to state licensure.”

First Alliance, which has seven branch offices statewide, finances its loans largely with money raised from public investors. It is one of the larger providers of second mortgages in the state.

It raised about $65 million from 5,000 investors just in the past year and lent out most of it, according to G. W. (Bill) McDonald, assistant corporations commissioner, who noted that the suit also alleged violation of state securities laws.

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Many victims “don’t know they are victims,” McDonald said, because they are not aware of the reasons for rejection of their loan applications or that they are paying more interest than borrowers in other areas on loans with other less favorable provisions.

First Alliance owners Brian Chisick and his wife, Sarah, who are president and vice president, respectively, were named defendants, along with various corporate affiliates and two other individual executives.

Chisick said Wednesday that he had not read the allegations and referred questions to his attorney, Paul J. Hall.

Hall denied that First Alliance has practiced racial discrimination. He said that about 20% of its loans are to black borrowers, which he said is higher than the percentage of blacks in California’s population, and that an additional 25% of the firm’s loans are to Latinos and other minorities. The state complaint alleged discrimination only against blacks.

The lawyer said the Corporations Department has refused to engage in what the Holden Act specified as “mediation, conciliation and persuasion” to try to remedy any alleged problems before going to court. If the department had done that, Hall said, it would have learned that First Alliance has “a strong record of minority lending.”

The suit noted that First Alliance widely advertises its mortgage loans by direct mail and radio announcements.

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Screening of applicants is carried out with a detailed set of instructions from Brian Chisick, who closely monitors the results, the state’s suit said.

Based on reports from insiders and customers, the suit alleged that the firm’s basic procedures to avoid loans in black areas included the following:

* First Alliance advertises for the public to apply for mortgage loans by calling a toll-free telephone number. Specialists field the calls, called “leads,” at a special room at company headquarters in the city of Orange.

* The specialists ascertain the correct ZIP code of the caller’s address and check it against the “Never Never Land” list.

* All calls from people who have ZIP codes that appear on the list are “summarily” rejected, the suit said, regardless of the prospective borrower’s equity or demonstrated ability to repay a loan.

* Personnel also print in bold capital letters the word “area” and circle the ZIP code on loan inquiry sheets to indicate that the reason for rejection is “the area’s racial composition.”

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When First Alliance does pursue a loan inquiry, the suit said, its appraisers are instructed to find the prospective borrower’s home on a Thomas Bros. map that shows census tract numbers for all areas of a particular city. The firm’s appraisers then list in their work papers the percentage of blacks living in the area, as ascertained by ethnic data compiled for census tracts, the suit said.

Loan officers are instructed to be evasive in answering questions from potential borrowers, the suit alleged.

According to the suit, there are several ways in which the firm discriminates in lending procedures in areas that have black populations of more than 30%.

One is by charging a higher interest rate (now commonly 13.5%, contrasted with 11.95% in other areas, according to McDonald). Another is to limit the amount of a loan as a percentage of appraised value. Another is to give shorter-term loans.

What the victim does not know, McDonald said, is that a mile away a white borrower may be receiving a higher loan-to-value ratio, a lower interest rate and a longer term loan.

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