Lender First Alliance Files for Bankruptcy, Says it Will Close

Amid a growing national debate over predatory mortgage lending, beleaguered First Alliance Corp. abruptly filed for bankruptcy Thursday and said it will 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” lending 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 gouging borrowers with high fees and interest rates and for 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 30-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 last four years.

Chisick, 60, who owns 70% of the company, could not 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 currently 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 loans fees, which are typically 10% to 15% of the loan amount, contrasted with 3% to 5% for other sub-prime lenders and about 1% for borrowers with good credit.

For several years, however, 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.”

The association 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 last 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 that 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 warehouse 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 probably 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.

“Wall Street has been getting out of the game for some time,” said Merrill Ross, analyst at Friedman, Billings, Ramsey.

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Staff writer Edmund Sanders can be reached at edmund.sanders@latimes.com.