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Chase says fraud; Advanta stunned

Chase Manhattan Mortgage Corp.'s current allegations against Advanta Corp., while at first blush similar to Fleet Bank's earlier lawsuit against the company, makes a clear distinction: this time Advanta is accused of fraud.

Chase is suing Advanta for $67 million in damages associated with Chase's acquisition of Advanta's mortgage business, which closed in February, following an estimated six-month due diligence period.

The lawsuit claims that Advanta intentionally deceived Chase by not disclosing an uncustomary servicing advancing practice in relation to its owned loan portfolio, which skewed loss figures and income on the portfolio of securitized loans.

"It is absolutely, 100% untrue," Advanta's Chairman and CEO, Dennis Alter, said to analysts and investors during a conference last call week. "There's not a word of truth in it. They had, and were given, and had access to the very information which they're complaining about not having..."

Cited from an Advanta press release, "Advanta believes that the lawsuit is inappropriate and without merit and the company will vigorously defend itself. Chase and its advisors had access to all relevant information in connection with the transaction and Advanta has complied fully with its agreements and the applicable rules."

Essentially, Chase alleges that it was Advanta's practice not to reimburse itself on servicing advances on loans it was servicing for itself. Servicing advances are generally reimbursed near the top of the waterfall. Any difference between the amount received through foreclosure on a mortgage and the servicing advance is deducted from the excess cashflow, which dents the residual. According to Chase, since Advanta was not reimbursing itself for the advances, losses in the pool were not showing up to the extent they would have.

However, according to Advanta, the bank was reimbursing itself from the cashflows on the deal.

"Delinquency interest advancing was always taken into account and reflected in the evaluation of our retained interest and our income recognition accounting," Alter said. "The most important thing [is that] it was all fully disclosed, they had all the relevant information, and everything we represented was 100% accurate."

During the conference call, Alter also noted Advanta's brush with the regulators, which put a "huge spotlight" on the bank's servicing practices and residual valuations. "This was not an area of low visibility," he said.

Recall last May: the Office of the Comptroller of the Currency (OCC) set down a cease and desist order on Advanta, requiring the bank to make significant changes in its residual valuation methods, which included raising the discount rate of the residuals to 18% from 15%, effecting a $214 million write-down.

Additionally, the OCC ordered Advanta's banking subsidiaries to stop making servicing advances on loans that were more than 180 days delinquent. As reported at the time (see ASR 6/12/00), Advanta Corp., which is not a banking entity and not subject to OCC restrictions, was still able to advance on servicing as it saw fit.

As for Fleet, in the original lawsuit raised against Advanta, Fleet claimed Advanta overvalued its credit-card business and failed to disclose liabilities associated with the portfolio. Just prior to the mortgage sale to Chase, Advanta put aside $70 million in an escrow account, pending the outcome of the Fleet/Advanta lawsuit.

Advanta trudges on

Despite never-ending headaches for the corporation, Advanta has reportedly done quite well as a monoline small business credit card provider. The company has completed four securitizations for more than $1.3 billion in proceeds.

According to Mike Coco, who heads up Advanta's securitization activities, the deals are performing in line with expectations. Advanta had told investors in February that chargeoffs would slightly increase due to portfolio seasoning. The porfolio experienced rapid growth in late 1999 and early 2000, which has since leveled.

"Clearly our portfolio is also being affected by the slowdown of the economy as well," Coco said. "The bankruptcies and loss that everyone else is experience is hitting our portfolio as well."

Still, excess spread levels on the business card is healthier than the typical consumer card portfolio, Coco said.

Advanta anticipates another deal this year. The company last came in April, with a $290 million deal via Barclays Capital.

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