Sub-prime lender agrees to settle FTC charges

Nu West Inc., a Bellevue, Wash.-based lender, and company owner Georg Frey have agreed to settle Federal Trade Commission charges that they violated the Home Ownership and Equity Protection Act (HOEPA), the Truth in Lending Act (TILA) and the FTC Act when making high-cost loans to consumers that were secured by the consumers' homes.

According to an FTC press release, "sub-prime" lenders generally extend credit to higher-risk consumers and charge significantly higher rates and fees than lenders charge borrowers who obtain prime loans.

The FTC's complaint alleges that the defendants violated HOEPA by failing to disclose to consumers material costs of the loans and other information at least three days before the closing.

The complaint also alleges that the defendants included prohibited balloon payments and increased interest rate provisions in the notes, and made direct payments to home improvement contractors.

The settlement prohibits the defendants from violating any provisions of the TILA, HOEPA, and the FTC Act and would require them to pay more than $160,000 in consumer redress.

"Deceptive lending tactics, like hiding essential information from borrowers, puts homeownership and home equity at risk," said Jodie Bernstein, director of the FTC's Bureau of Consumer Protection, in the release. "Consumers put their hopes and dreams into their homes, and laws like HOEPA are on the books to protect them."

Congress passed the Home Ownership and Equity Protection Act to prevent certain predatory lending practices.

HOEPA amended the Truth in Lending Act.

It provides special protections for consumers in certain refinancings with high-cost loans secured by their homes.

In loans covered by HOEPA, the lender must give the borrower certain disclosures in writing at least three business days before closing.

This information includes a notice that the consumer could lose his home and any money he has put into the home if he does not meet his obligations under the loan.

The notice also requires disclosure of the annual percentage rate, amount of payments and, if applicable, certain variable rate information.

The law also bans high-rate, high-fee loans, balloon payments due in less than five years, increasing the interest rate at default and most prepayment penalties.

Lenders also are prohibited from engaging in a pattern or practice of lending based on home equity without regard to consumers' ability to repay loans (asset-based lending) and making direct payments to home improvement contractors.

Other TILA provisions require disclosure of key credit terms and give consumers three days to rescind after they sign loan documents.

The FTC's complaint alleges that Nu West and Frey, in the course of making "HOEPA" loans, violated HOEPA by failing to disclose the material costs of the loans and other information at least three days before closing; including in the loan notes prohibited balloon payments and increased interest rate provisions, and by making direct payments to home improvement contractors.

In addition, the FTC charged the defendants with violating the TILA by understating the annual percentage rate, understating the finance charges in the required TILA disclosures; failing to give consumers rescission notices, and by disbursing loan funds to those consumers before the expiration of the rescission period.

Further, the complaint charges that the defendants violated Section 5 of the FTC Act by failing to disclose, or accurately disclose, material credit information key credit terms and costs such as APRs and balloon payments, and information concerning the right to rescind.

Finally, the complaint alleges that the defendants directed borrowers to falsely characterize consumer loans as business loans. This was done in an apparent attempt to evade HOEPA and the TILA, in violation of the FTC Act.