FTC CHARGES D.C. MORTGAGE LENDER WITH DECEPTION AND UNFAIRNESS AGAINST BORROWERS
January 30, 1998
Agency Alleges Misrepresentations Result In Loss of Homes
The Federal Trade Commission yesterday filed a 23-page complaint in U.S. District Court against Capital City Mortgage Corporation, a Washington, D.C.-area mortgage lender, and its owner, Thomas K. Nash, alleging numerous violations of federal law resulting in serious injury to borrowers, including the loss of their homes.
“It is critically important that all Americans, especially those who live in urban areas, have access to capital,” Jodie Bernstein, Director of the FTC’s Bureau of Consumer Protection, said. “Deceptive mortgage lending is false access because it hides from consumers essential information they need to make decisions about their single greatest asset — their home — and the equity they have spent years building. This conduct is particularly devastating because these loans are usually sought at a time of great need and borrowers are most susceptible to predatory practices that can strip consumers of substantial sums of money and ultimately their homes. The Commission brought this action to halt the activities of one enterprise engaging in deceptive mortgage lending in the Washington, D.C. area. But the Commission also took this action to inform the public of the negative consequences of such lending and to state that the Commission will act to halt such activity.”
The FTC’s complaint alleges that the defendants, Capital City and Nash, violated the FTC Act, which prohibits unfair and deceptive practices, as well as the Truth in Lending Act, the Fair Debt Collection Practices Act, and the Equal Credit Opportunity Act.
The complaint states that the defendants frequently made high interest rate (20 to 24 percent) loans to minority borrowers, elderly persons, or those with fixed or low incomes. The loans often are interest-only balloon loans in which a borrower, after making payments for the term of the loan, still owes the entire amount of the loan principal. These loans are often secured by the borrowers’ homes and typically are made based on the worth of the home rather than on a borrower’s creditworthiness or income.
The FTC Act
The complaint alleges that, in violation of Section 5 of the FTC Act, the defendants acted with deception and unfairness toward borrowers at the beginning, during, and at the end of the lending relationship. The complaint alleges that the defendants deceived borrowers about various loan terms; for example, by making representations that a loan was an amortizing loan that would be paid off by making payments each month, when in fact, the loan was an interest-only balloon loan in which the entire loan principal amount would be due after all the monthly payments were made. The complaint also alleges that the defendants deceived borrowers during the loan period with phony charges of inflated monthly payment amounts, overdue balances, arrears, service fees, and advances. For example, the complaint asserts that the defendants charged a substantial penalty against a borrower for not having insurance on a property when in fact the borrower had insured the property. Additionally, the complaint alleges that the defendants deceived borrowers regarding amounts owed to pay off the loans; for example, adding phony charges to the loan principal that were disclosed only at pay-off and only after accruing large amounts of interest. Further, the complaint alleges that the defendants violated the FTC Act by withholding some loan proceeds while forcing a borrower to make monthly payments for the entire loan amount, by foreclosing on borrowers who were in compliance with their loan terms, and by failing to release its liens on title to borrowers’ homes even after the loans were paid off. The complaint asserts that the defendants’ alleged law violations placed borrowers in default and positioned the defendants to foreclose on their property. After foreclosure, the defendants bought the property at auction for a price much lower than the appraised value of the property.
Truth in Lending Act
In its complaint, the FTC states that the defendants failed to comply with numerous provisions of the Truth in Lending Act, a statute specifically designed to provide consumers with accurate disclosures of the true costs of credit. Among other violations, the complaint alleges that the defendants failed to make the required disclosures at all or made disclosures that understated the cost of the credit, such as the annual percentage rate (APR) and the finance charge. In addition, the defendants failed to disclose the correct payments to be paid each month or the total of all payments required to pay off the loan.
Fair Debt Collection Practices Act
The FTC alleges that the defendants violated the Fair Debt Collection Practices Act by representing falsely that letters from its in-house attorney were from a third party collecting a debt, by making false and misleading representations when collecting loan payments, and by engaging in unfair or unconscionable debt collection practices.
Equal Credit Opportunity Act
The FTC’s complaint also alleges that the defendants violated the Equal Credit Opportunity Act and its implementing Regulation B, a statute designed to prevent discrimination by lenders. The complaint’s allegations include the defendants’ failure to take written applications for mortgage loans and to collect legally required information about the applicant’s race or national origin, sex, marital status and age. Without this required information, the FTC cannot effectively monitor whether a lender is illegally discriminating in its lending. In addition, the complaint alleges that the defendants failed to give borrowers certain notices when loan applications were rejected or withdrawn, including its principal reasons for denying the application.
In its complaint, the FTC asks the court to award consumer redress, to assess monetary penalties, and to restrain permanently the defendants from violating the law in the future.
Final “Operation Dialing for Deception” complaint unsealed:
April 19, 2002
The twelfth and final complaint filed through the FTC’s recently announced “Operation Dialing for Deception” law enforcement action has been unsealed by the U.S. District Court for the Middle District of Florida in Jacksonville. The FTC charged First Freedom Financial Corporation, Southern Telmark Corp., and Thomas Gregg Holloway with violating the FTC Act and Telemarketing Sales Rule (TSR) by soliciting customers nationwide and falsely promising to provide them with credit cards for an advance fee ranging from $79 to $229. The FTC’s complaint is available on the Commission’s Web site.
The defendants used “in-bound” telemarketing, which means that consumers called them after seeing their ads in magazines such as Reader’s Digest or receiving a post card inviting them to call a toll-free number for more information about a guaranteed credit card. After responding to the ads, which promised they would receive a credit card regardless of their credit history and with no security deposit required, the consumers found they had to pay the advance fee. The defendants allegedly also persuaded consumers to divulge their checking account information and routinely debited their accounts without their authorization, while not providing the card as promised. At best, in some cases, consumers received a “card” that could only be used to make purchases from the defendants’ merchandise catalog. Some consumers also were provided with an application for a major credit card from a separate financial institution, but not with the card itself, after paying the advance fee.
In this matter, the Commission has sought and received a temporary restraining order against the defendants, the appointment of a receiver, immediate access to the defendants’ business and files, an asset freeze, and other injunctive provisions. First Freedom and Telmark are South Carolina corporations, registered to do business in Florida, with their principal place of business in Jacksonville, Florida. The Commission vote authorizing staff to file the complaint was 5-0. The seal was lifted on April 16, 2002. The Florida Department of Agriculture Law Enforcement assisted the FTC in bringing this case. (FTC File No. 002-3076, Civ. No. 3:02-CV-343-J20TEM; staff contact is Ronald E. Laitsch, FTC Southeast Region, 404-656-1358; see related press release dated April 15, 2002.)
Capital City Mortgage Corp. Defendant Settles with FTC
May 14, 2004
Former General Counsel Barred from Debt Collection
The former general counsel of Capital City Mortgage Corporation, a Washington, DC-area mortgage lender and servicer whose deceptive lending practices the Federal Trade Commission is challenging in federal court, has settled FTC charges that his actions violated federal law. The consent decree against Eric J. Sanne permanently bars him from participating in any debt-collection business and orders him to pay $20,000.
In January 1998, the FTC filed a complaint against Capital City and its president, Thomas K. Nash, alleging that the defendants deceived consumers about various loan terms leading to inflated monthly balances, overdue balances, service fees, and pay-off amounts. The FTC’s complaint stated that these practices led to default and foreclosure in many instances. Further, the FTC alleged that the defendants withheld some loan proceeds while forcing borrowers to make monthly payments for the entire loan amount, foreclosed on borrowers who were in compliance with their loan terms, and failed to release liens on title to borrowers’ homes even after the loans were paid off. The FTC later amended the complaint to add Sanne, and more recently amended the complaint a second time, after Nash died, to substitute Nash’s probate estate as a defendant and to add relief defendants.
The FTC alleges that in his position as general counsel, Sanne violated the Fair Debt Collection Practices Act (FDCPA) and the FTC Act by engaging in unfair and deceptive debt- collection practices, including sending letters to borrowers that falsely claimed he was from a third party collecting a debt, rather than a Capital City employee, and by seeking to collect money not owed.
The terms of the order against Sanne bar him from engaging in any “debt collection” business. Additionally, Sanne is required to pay $20,000 and must pay an additional $50,000, if he is found to have materially misrepresented his financial condition. The order also contains standard recordkeeping provisions to assist the FTC in monitoring the defendant’s compliance.
The Commission vote to authorize the staff to file the consent decree and order was 5-0. The consent decree and order for permanent injunction were entered by the U.S. District Court for the District of Columbia on May 6, 2004. The FTC claims against Capital City, the Estate of Thomas K. Nash, and two relief defendants is scheduled for trial on June 6, 2005.
In a separate statement, Commissioner Mozelle Thompson said that even though he voted to accept the consent decree settling the FTC’s allegations against Eric Sanne, he did so with reservation. “In light of the alleged conduct at issue, I would have supported stronger relief,” he said.
Thompson noted that as Capital City’s in-house general counsel, Mr. Sanne allegedly played an important role in the illegal debt collection practices engaged in by Capital City. According to the FTC’s complaint, Capital City, a subprime market lender that extends credit to consumers, small businesses and churches in the Washington Metropolitan area, deceived borrowers, many of whom were minority and/or elderly persons living on fixed or low incomes, about the terms and payments of their loans. “These practices caused many borrowers to default on their loans and caused some of them to lose their homes,” and “[g]iven Mr. Sanne’s status, as well as the vulnerabilities of many of the consumers harmed in this matter, Thompson said, “the alleged conduct is particularly reprehensible.”
Capital City Mortgage Settles FTC Charges
February 24, 2005
A mortgage lender and servicer has settled Federal Trade Commission charges that it deceptively induced consumers into taking loans secured by their homes, overcharged borrowers, and, in some instances, caused consumers to lose their homes. The settlement permanently bans the defendants from future lending fraud and requires them to pay consumer redress and other monetary relief totaling at least $750,000.
In January 1998, the FTC filed a complaint against Washington, DC-based Capital City Mortgage Corporation and its president, Thomas K. Nash, alleging that the defendants deceived consumers about various loan terms, resulting in serious injury to borrowers. According to the FTC, the defendants frequently targeted consumers with fixed or low incomes with offers for loans secured by the equity of the borrowers’ homes, rather than their creditworthiness. The FTC charged that the defendants included phony charges in monthly statements to borrowers, added phony charges to loan balances, forced consumers to make monthly payments for the entire loan amount while withholding some loan proceeds, foreclosed on borrowers who were in compliance with the terms of their loans, and failed to release liens on borrowers’ homes after the loans were paid off. The complaint also charged the defendants with violations of the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act.
The FTC later amended its complaint to include Eric J. Sanne, the former General Counsel of Capital City, charging him with sending letters to borrowers falsely claiming he represented a third-party debt collector, rather than Capital City, and seeking to collect money consumers did not owe. In a May 2004 settlement, Sanne was barred from participating in any debt-collection business and ordered to pay $20,000 in consumer redress. The FTC also amended its complaint a second time, after Nash died in 2002, to substitute Nash’s estate as a defendant and add relief defendants.
The stipulated order requires the defendants to pay $750,000 and set up a $350,000 performance fund that will be available to the Commission or any borrower if Capital City does not comply with the order. It also prohibits Capital City from misrepresenting the terms, conditions, fees, or payment amounts of any loan; failing to disclose all required fees to borrowers at least three days before loan closing or assessing any fee, including interest or real estate taxes, not authorized and disclosed to consumers; misrepresenting that it will not attempt to take or take the title to a borrower’s home while the borrower is in compliance with loan obligations; and misrepresenting that it will maintain accurate loan servicing records that will be available to borrowers.
The order also prohibits the defendants from failing to require sufficient escrow amounts and make timely disbursements of escrow funds; placing insurance on a borrower’s property without first determining whether insurance is already in place and obtaining the borrower’s express consent; increasing the principal amount of any loan or requiring additional security on any loan without the borrower’s consent; failing to disburse loan proceeds to a borrower when the borrower has complied with the terms of the loan; failing to release a lien on property securing a loan within 30 days of the loan payoff; and threatening a consumer’s loan or property title to induce the consumer to pay additional amounts not required by the loan or by law.
In addition, the defendants are barred from violating the Truth in Lending Act and Regulation Z by failing to identify the creditor or the annual percentage rate for a loan; failing to make required disclosures before consummating a consumer credit transaction; failing to make or correct “good faith” disclosures; understating the finance charge or annual percentage rate or overstating the amount financed; failing to disclose accurately the payment schedule or the existence of a balloon payment; making disclosures that do not accurately reflect the legal obligation between the parties; failing to include courier fees, inspection fees, and certified check fees in the stated finance charge; and failing to use required standard loan forms.
The defendants are further barred from violating the Fair Debt Collection Practices Act by misrepresenting that a Capital City employee is instead an independent attorney or third party debt collector; misrepresenting to consumers the amount or legal status of any payment due; and collecting any amount not authorized by law.
The order also prohibits the defendants from violating Regulation B and the Equal Credit Opportunity Act (ECOA) by failing to take written applications for credit; request certain required information regarding race, ethnicity, sex, marital status, and age; inform consumers that this information is collected to monitor compliance with federal laws that prohibit creditors from discriminating against applicants; and provide applicants with a written “adverse action” notice containing the reasons for the action taken and the contact information for the federal agency monitoring Capital City’s compliance with ECOA.
Additionally, the order requires the defendants to provide borrowers with (1) a monthly statement that accurately discloses the total amount of the next payment owed – including fees, identifies the way in which the consumer’s prior payment was applied to the loan, and identifies a method for consumers to dispute the charges; (2) an annual accounting status of the loan as of December 31 each year, identifying the amounts credited toward repayment of interest and principal, amounts credited to other purposes such as late fees, and the status of any escrow account; and (3) at the borrower’s request, records to document any fee and a good faith estimate of the amount required to repay the loan in full.
The order also contains standard recordkeeping and reporting requirements to assist the FTC in monitoring the defendants’ compliance.
The Commission’s amended complaint named Capital City Mortgage Corp.; Marcia C. Fidis, in her capacity as representative of the Estate of Thomas K. Nash; and Eric J. Sanne as defendants. The complaint names Thomas K. Nash Family Trust and Alan W. Nash, in his capacity as trustee; and Nash Marital Trust under Will of Thomas K. Nash and Marcia C. Fidis and Caroline Koestner Nash, in their capacities as co-trustees, as relief defendants.FTC Charges D.C. Mortgage Lender with Deception and Unfairness Against Borrowers by Amanda Miller