Ameriquest Capital Holdings Corp. last week settled the second-largest predatory lending suit in U.S. history that had the largest subprime loan originator's upper management embroiled for more than a year.

The Orange, Calif.-based lender will pay $325 million to settle claims of unfair lending practices from 49 attorneys general. Borrowers had alleged they were pressured into loans through deception and so-called high pressure sales tactics.

For secondary market participants, the lawsuit has several implications. If individual borrowers choose to accept their portion of the $295 million compensation, they essentially forfeit the right to participate in a consumer-driven class action lawsuit. Also, fraud and fair lending practices implemented by the privately held Ameriquest could raise the bar for the industry as a whole.

The lender is charged with implementing a host of requirements aimed at decreasing instances of fraud and predatory lending, such as providing a centralized appraisal process and using third-party closing agents to prevent conflicts of interest. The lawsuit covered borrowers who obtained loans from Ameriquest between Jan. 1, 1999, and Dec. 31, 2005. Ameriquest did not acknowledge any wrongdoing in the settlement, and did not suffer any restrictions or limitations on its licenses.

"If I'm an investor, I'm satisfied with a couple of things. I'm satisfied that there is a settlement in place, and it is for a manageable amount for the company, and I'm satisfied that there is a monitor in place so that the company does modify its practices," said Rui Pereira, a managing director at Fitch Ratings. "In respect to existing deals, I can say that Ameriquest's existing deals that we've been monitoring have been performing within expectations."

Lender agrees to numerous requirements

The subprime lending giant agreed to: provide borrowers a one-page form clearly describing all loan terms at least three days prior to the close; centralize the appraisal process and institute random appraiser selection; require sales associates to follow preapproved scripts; require customers to sign off on the listed amount of their stated income; ensure subprime refinancing will only take place if it is beneficial to the borrower; and use third-party closing agents to prevent conflicts of interest.

"We are probably not too concerned with what happened before, but we want to make sure now that after the settlement, Ameriquest will not encounter the same problems again," said one frequent buyer of Ameriquest loans. "We want them to put processes in place to make sure that it will not happen again."

Ameriquest was the largest subprime loan originator through the third quarter of 2005, bringing $62 billion to the market, according to Barclays Capital. The lender is also the second largest subprime loan servicer, with $76 billion in loan volume as of the third quarter.

Bondholders may have cause for concern

While a second home equity ABS investor noted that a significant portion of loans originated from 1999 through 2001 were already paid off by borrowers during the flood of refinancing that came with the historically low interest rates in recent years, he said 2002, 2004 and 2005 vintages could be of more concern to Ameriquest bondholders.

"It's very concerning. It makes you think of the quality of the collateral backing some of the MBS out there, and it makes you want to pay attention to some of the finer details in this collateral," he said. "[Ameriquest] has built a huge machine and they've got to keep it going. Over the last 24 months, they've put a lot of pressure on originators to keep the volume up, and their originating practices changed throughout the year."

However, the source said Ameriquest's size makes it an easy target for alleged practices that could be taking place at many other issuers, particularly smaller sized shops. And, as Pereira mentioned, because the lawsuit targeted a privately run, non-bank entity, it is likely to push other lenders to reform practices that may not be up to par.

"Just because you are a bank... does not mean you can make your own rules. If you have a business model on a smaller scale, but may be similar to Ameriquest, I'd think you'd take the same actions and make sure you are not subject to a similar type of settlement," he said.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.