Lehman Bros. Sued Over Ties to Sub-Prime Lender

Customers of First Alliance Corp. are suing a key Wall Street backer of the Irvine mortgage company for allegedly helping to support the company’s controversial lending practices.

Federal authorities, meanwhile, issued a report Tuesday in Los Angeles criticizing sub-prime lenders such as First Alliance for preying on largely minority and poor neighbors and making high-cost loans to borrowers who can least afford them.

The new lawsuit was filed in U.S. Bankruptcy Court in Santa Ana by two First Alliance borrowers, naming investment banker Lehman Bros. as a co-defendant.

It marks the first time Lehman Bros. has been sued over its role in providing a $100-million credit line and other financial support to First Alliance.

A spokesman for Lehman said the company had not seen the complaint and had no comment.

Consumer groups and other critics of predatory lending practices had targeted First Alliance as one of the nation’s worst offenders. Not only were its rates usually higher than those charged by other sub-prime lenders, its loan fees typically ran 10% or more of the loan amount, while other sub-prime lenders charged 3% to 5%. Borrowers with good credit could get mortgages with no fees to 1 or 2 points added.

In the face of numerous state investigations and borrower lawsuits, First Alliance filed for bankruptcy protection last month. The company has closed down and plans to liquidate its operations.

The complaint, filed as an adversary action in the First Alliance bankruptcy case in Santa Ana, also accuses First Alliance of defrauding its customers and seeks $100 million in damages.

“Our concern is that the victims of First Alliance won’t receive anything in the bankruptcy,” said Thomas Jenkins, the San Francisco lawyer who filed the complaint.

William Lobel, a bankruptcy attorney at Irell & Manella representing First Alliance, said the company has not decided how it will respond to the suit. The company has denied defrauding customers.

Separately, lenders such as First Alliance came under repeated fire at a news conference in Los Angeles, where federal officials decried the increasing amount of sub-prime lending.

“For the unscrupulous, the housing market is where the money is,” Gregory Baer, the U.S. Treasury Department’s assistant secretary for financial institutions, said at a gathering at the Radisson Midtown Hotel.

A report that the Department of Housing and Urban Development released at the conference shows that the Los Angeles metropolitan area experienced “exponential growth” in sub-prime lending that hit poorer, and particularly minority, neighborhoods heavily. Other areas of the nation suffered even more under the adverse effects of predatory sub-prime lending, the report shows.

Baer pointed out that one difficulty in regulating sub-prime lending is that every loan is different, making it hard to tell whether customers are getting good deals.

William Apgar, HUD’s assistant secretary for housing, agreed. “These are complicated products and are easily abused,” he said.

Consumers Union and the American Assn. of Retired Persons are seeking federal legislation that would put a limit on loan fees and interest rates. Consumers Union also wants a law requiring lenders to take into consideration a borrower’s ability to repay a loan.