Case Against First Alliance Stalled by Judge

The state’s highly publicized redlining case against First Alliance Mortgage Co. hit an obstacle Monday when a Los Angeles Superior Court judge stalled a landmark enforcement action by the state Department of Corporations.

Judge Robert M. Mallano said he would not make a key ruling until next month and in the meantime will take up a question on which he put top priority: When California legislators passed the Holden Act in 1977 to ban racial discrimination in property lending by certain financial institutions, how did they intend that the law be enforced?

When the department filed suit last Wednesday seeking an injunction against Orange-based First Alliance, it was the first such move against a state-regulated lender in the history of the Holden Act.

Since there have been no appeals court rulings to guide the lower courts, Mallano told attorneys, he settled on a “prudent” course. That, he explained, is to have the parties inform him thoroughly on the issue of legislative intent before he takes up the substance of the state’s request for an injunction.

Alleging a pattern of illegal discrimination in heavily black neighborhoods of Los Angeles, San Diego and the San Francisco Bay Area, the Department of Corporations has asked the court for punitive measures that include replacing the firm’s current management with a receiver.

But First Alliance contends that the Legislature intended that regulators taking action under the law first try conciliation and then issue an administrative cease-and-desist order before resorting to injunctive action in court.

Willie Barnes, who was head of the Corporations Department when the 1977 law was passed, is now an attorney for First Alliance. He told the court that the department did not proceed correctly in the case, a point that was disputed by Robert N. Kwong, a department attorney.

Mallano referred to the “serious nature” of the suit and said the question was how the law was to be enforced. He set a hearing Sept. 16 for the company to show cause why it should not be enjoined.

First Alliance attorney Paul J. Hall said he did not think that the judge should take even that step.

Mallano then reminded the lawyer of declarations in evidence from former First Alliance employees, alleging specific law violations. The state has said such inside assistance gave the opportunity to bring the first enforcement action.

As an example of the state’s evidence cited by the judge was a case of a disabled worker to whom First Alliance made a loan with a balloon payment. According to the court document, the borrower was not told about the balloon payment and could not afford to pay it.

The state also alleged that the balloon payments commonly built into First Alliance loans at the end of five-year periods were aimed at forcing borrowers to refinance with additional “origination” fees amounting to 21% of the loan.