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A new breed of credit card offer tied to the equity in the recipient's home is popping up in mailboxes nationwide.
Some of these tempting offers target the elderly, some target those with credit problems. Many carry interest rates more than double the norm. And consumer advocates are worried.
One of the mailers circulating nationwide is from a finance company called First Alliance Mortgage Co. in Irvine, Calif.
The elderly and disabled are easy targets
"We were concerned with (First Alliance's) plans to target the elderly, disabled and vulnerable with this credit card," said Norma Garcia, special projects attorney for Consumers Union's West Coast regional office in San Francisco. "We felt putting a risky product in the hands of old or inexperienced borrowers was asking for trouble."
The group has opposed the plans of First Alliance to acquire a thrift as a means to issue these home equity lines of credit.
Carol Hong received one of those credit card offers from First Alliance. The company told her she could write off the interest on the card on her income tax return, but first she had to pay a $179.50 setup fee and an annual fee of $38.50 for the card.
Consumer shocked by card terms
"You really had to read (the offer) with a magnifying glass before you got the full picture," said the 59-year-old former bookkeeper. "I was totally shocked when I realized people ... could get this card not realizing it was tied to the possibility they could lose their home."
That's because the application was actually for a home equity line of credit (HELOC), which the borrower could access through a credit card. The fine print of the application revealed that the interest rate on the loan could fluctuate between 19.8 percent and 29.8 percent a month -- Bank Rate Monitor's national HELOC average is 8.62 percent.
First Alliance spokesman Mark Mason acknowledged the company has been test-marketing the home equity credit card for six months, targeting people with credit problems, but he defended the high interest rates.
First Alliance defends exorbitant interest rates
"You have to remember we are dealing with people who had a foreclosure, or bankruptcy, and who have not had access to credit. They are not on anyone's marketing list," Mason said.
Tying the card to the borrower's home equity alleviates some of the risk for First Alliance, he added, and allows the company to offer credit to people who may be turned down by other lenders.
First Alliance and Firstplus Financial Group, Dallas, are two finance companies that now are offering a home-equity-backed credit card. But because First Alliance is not a bank or a thrift, it issues its credit cards through the $4.2 billion-asset Fidelity Federal Bank, F.S.B., a unit of BankPlus Corp., Los Angeles.
Consumer groups block proposed thrift purchase
First Alliance had hoped to purchase a Newport Beach, Calif. thrift called Standard Pacific Savings, in order to expand. But consumer groups complained to the Office of Thrift Supervision (OTS), which regulates the savings & loan industry.
"It was the company's reputation, particularly because of pending lawsuits and the serious allegations of fraud and misrepresentation of facts on home equity based loans, that prompted Consumers Union to oppose it," Garcia added.
First Alliance currently is battling five separate lawsuits in California courts. David Hoffman, the San Jose, Calif., attorney who represents some of the plaintiffs suing First Alliance said that "all of these cases involve the borrowers getting loans but paying higher costs than expected."
Five lawsuits accuse First Alliance of fraud
Hoffman has asked the court to order First Alliance to return between $20 million to $30 million to borrowers that he alleges the company obtained through fraud and unfair and deceptive business practices.
Carol and Henry Hong are two of the people suing First Alliance. Their first relationship with the company was a refinancing of a mortgage from 10.5 percent to 8.75 percent.
"We were told it would cost us $450," she said, explaining that they asked "all the right questions" during the four-hour meeting in the company's offices. She thought the company was giving her the right answers.
A refinance loan goes bad ... really bad
Unfortunately, the $180,000 loan turned out to be a mortgage for $206,000. "When we finally got the trust deed, we found the company had charged us $26,000 for making the loan," she said.
By the time they unraveled what had happened, Mrs. Hong said it was too late for them to back out of the loan. Ultimately, they refinanced again through another company and sued First Alliance for its actions.
Despite the lawsuit, First Alliance added the Hongs to their marketing list for the home equity-based credit card. "They kept telling me I could use the card to get a loan," she said. "I think they must have the most aggressive and amazing marketing system."
Nonprofits warn against the offers
Consumers Union's Garcia describes home-secured credit cards as "expensive and extremely risky."
"We don't advocate that borrowers start putting their home equity on the line for goods and services typically purchased by credit card such as restaurant meals and department store purchases," she said.
First Alliance says consumers misunderstand
First Alliance's Mason said the company was unaware of Consumers Union's objections. The company withdrew its petition to the OTS for permission to buy a thrift. As to the lawsuits, Mason said a company dealing with less than credit-worthy borrowers can expect litigation.
"Borrowers many times take these loans during financial crisis and urgency. They don't comprehend the loan's terms even when fully disclosed," he said, adding that five lawsuits out of 10,000 existing loans is "not a lot of litigation."
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