UNITED STATES DISTRICT COURT
 

FOR THE EASTERN DISTRICT OF TEXAS
 

FEDERAL TRADE COMMISSION, 

Plaintiff, 

v. 

EMC MORTGAGE CORPORATION,
 

a Delaware corporation, and
 

THE BEAR STEARNS COMPANIES LLC,
 

a Delaware limited liability company,
 

Defendants. 

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Civil No. 

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PLAINTIFF FEDERAL TRADE COMMISSION'S COMPLAINT
 

FOR PERMANENT INJUNCTION AND OTHER EQUITABLE RELIEF
 

Plaintiff, the Federal Trade Commission ("FTC" or "Commission"), by its undersigned 

attomey~, alleges as follows: 

1. This is an action under Sections 5(a) and 13(b) of the Federal Trade Commission 

Act ("FTC Act"), 15 U.S.C. §§ 45(a) and 53(b), to secure permanent injunctive relief and other 

equitable relief, including rescission, reformation, restitution, and disgorgement, against 

defendants for engaging in unfair or deceptive acts or practices in violation of Section 5(a) of the 

FTC Act, as amended, 15 U.S.C. § 45(a), and acts or practices in violation ofthe Fair Debt 

Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq., as amended, the Fair Credit 

Reporting Act ("FCRA"), 15 U.S.C. § 1681 et seq., as amended, and the Truth in Lending Act's 

("TILA") implementing Regulation Z, 12 C.F.R. § 226, as amended. 

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JURISDICTION AND VENUE
 

2. This Court has subject matter jurisdiction over this matter pursuant to 15 U.S.C. 

§§ 45(a), 53(b), 1607(c), 1681s(a), 1692/(a), and 28 U.S.C. §§ 1331, 1337(a), and 1345. 

3. Venue is proper in the United States District Court for the Eastern District of 

Texas under 28 U.S.c. §§ 1391(b) and (c), and 15 U.S.C. § 53(b). 

PLAINTIFF 

4. Plaintiff, the Commission, is an independent agency ofthe United States 

Government created and given statutory authority and responsibility by the FTC Act, as 

amended, 15 U.S.C. §§ 41-58. The Commission is charged, inter alia, with enforcing Section 

5(a) ofthe FTC Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices in or 

affecting commerce, and the FDCPA, FCRA, and TILA. The Commission is authorized by 

Section 13(b) ofthe FTC Act, 15 U.S.C. § 53(b), Section 108(c) ofthe TILA, 15 U.S.C. 

§ 1607(c), Section 621(a) ofthe FCRA, 15 U.S.c. § 1681s(a), and Section 814 of the FDCPA, 

15 U.S.C. § 1692/, to initiate federal district court proceedings to enjoin violations of the FTC 

Act, the FDCPA, the FCRA, and the TILA and its implementing Regulation Z, and to secure 

such equitable relief as may be appropriate in each case. 

THE DEFENDANTS 

5. Defendant The Bear Stearns Companies LLC, f/d/b/a The Bear Stearns 

Companies, Inc., ("Bear Stearns") is a Delaware limited liability company that maintains its 

principal place of business in New York, NY. Bear Stearns transacts business in this District. 

6. Defendant EMC Mortgage Corporation ("EMC") is a Delaware corporation that 

maintains its principal place of business in Lewisville, TX. Defendant EMC is a wholly owned 

subsidiary ofdefendant Bear Stearns. EMC transacts business in this District. 

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7. Defendant Bear Stearns directs, controls, fonnulates, or participates in the acts or 

practices alleged in this complaint. Defendant EMC acts in the interests, and is the alter ego, of 

defendant Bear Stearns. 

8. Defendants are "debt collectors" as defined in Section 803(6) ofthe FDCPA, 15 

U.S.C. § 1692a(6). 

9. In connection with the servicing and collection ofmortgage loans, defendants 

furnish infonnation to consumer reporting agencies. As such, defendants are subject to Section 

623 ofthe FCRA, 15 U.S.C. § 1681s-2, which imposes a series ofduties and prohibitions upon 

any person or entity that furnishes infonnation to a consumer reporting agency. 

10. Defendants are "creditors," as that tenn is defmed in Section 103(t) ofthe TILA, 

15 U.S.C. § 1602(t), and Section 226.2(a)(l7) ofRegulation Z, 12 C.F.R. § 226.2(a)(17), and 

therefore are required to comply with applicable provisions ofthe TILA and Regulation Z. 

COMMERCE 

11. The acts and practices of defendants alleged in this complaint have been in or 

affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C. § 44. 

DEFENDANTS' BUSINESS PRACTICES 

12. Defendants playa prominent role in the secondary market for residential 

mortgage loans by acquiring, servicing, and selling large volumes of such loans. In recent years, 

during the explosive growth of the mortgage industry, defendants acquired and securitized loans 

at a rapid pace, paying inadequate attention to the integrity of consumers' loan infonnation and 

to sound servicing practices. As a result, in servicing consumers' loans, defendants neglected to 

obtain timely and accurate infonnation on consumers' loans, made inaccurate claims to 

consumers, and engaged in unlawful collection and servicing practices. These practices 

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occurred prior to JP Morgan Chase & Co.'s acquisition ofBear Stearns, which became effective 

on May 30, 2008. 

13. Defendants operate a vertically integrated mortgage business, which includes the 

acquisition and servicing ofresidential mortgage loans, and the packaging ofthose loans into 

mortgage backed securities ("MBS") for sale to investors. EMC is the mortgage servicer for 

many ofthe loans acquired by defendants. Bear Stearns' employees are primarily responsible 

for the acquisition ofloans, such as the identification, bidding, and negotiation of deals, although 

frequently EMC is listed as the purchaser and subsequent seller on MBS documents. In many 

instances, after the defendants have acquired loans and EMC has begun servicing them, Bear 

Stearns packages the loans into MBS. After the loans have been packaged into MBS and sold on 

the secondary market, EMC often continues to service the loans pursuant to servicing 

agreements. In some instances, EMC also retains a residual ownership interest in the loans. 

14. Many ofthe loans acquired, serviced, and sold by the defendants are subprime or 

"Alt-A," i.e., less than prime, or "A," credit. These loans include "nontraditional" mortgages 

such as pay option adjustable rate mortgages ("ARMs"), interest-only mortgages, negative 

amortization loans, and loans made with little or no income or asset documentation. In recent 

years, defendants funded and acquired an increasing number ofloans, and EMC's loan servicing 

portfolio overall grew significantly. As of September 2007, EMC serviced over 475,000 

mortgage loans with a total unpaid principal balance of approximately $80 billion. 

15. As a mortgage servicer, EMC makes various representations to borrowers, 

including on loans newly acquired by defendants. Specifically, in collection calls and notices, 

monthly statements, payoff statements, foreclosure notices, bankruptcy filings, and otherwise, 

EMC routinely makes representations to borrowers about their loans, including: (1) the unpaid 

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principal balance; (2) the due date; (3) the interest rate; (4) the monthly payment amount; (5) the 

delinquency status; and (6) fees and corporate advances assessed by prior loan servicers. In 

many instances, EMC makes these representations to borrowers within days ofthe transfer ofthe 

loans for servicing to EMC. For example, EMC begins making collection calls on those 

transferred loans that are purportedly past due. In many instances, however, EMC makes these 

early collection calls and sends collection notices to consumers before it has obtained complete 

loan information from the seller and before it has conducted quality control and other data 

integrity checks to ensure the accuracy ofthe representations it makes to borrowers. 

16. In numerous instances, EMC has lacked a reasonable basis for its representations 

to borrowers, because it failed to obtain accurate and complete information about the consumer's 

loan account before making the representation. Despite indications that loan data obtained from 

prior loan servicers and loaded onto its servicing system was likely inaccurate or unverified, 

EMC nonetheless used that data to make representations to borrowers about their loans. As a 

result, defendants have made inaccurate claims to consumers and engaged in unwarranted 

collection practices. 

17. As a mortgage servicer, EMC receives consumers' disputes regarding the status 

and handling of their loans. In numerous instances, EMC has failed to investigate and resolve 

consumers' disputes in a timely manner. In addition, in numerous instances, EMC has failed to 

report consumers' loan accounts as disputed when furnishing information to consumer reporting 

agencIes. 

18. In connection with loans that were in default when obtained by defendants, EMC 

has failed to disclose in initial communications with consumers that the debt collector is 

attempting to collect a debt and that any information obtained will be used for that purpose. In 

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addition, EMC has failed to send consumers a written notice, or has sent untimely or defective 

notices, containing the amount of the debt, the creditor's name, and the consumer's rights to 

dispute the debt and obtain verification ofthe debt. 

19. In numerous instances, including in connection with newly-acquired loans, EMC 

has made collection calls to borrowers repeatedly and with excessive frequency under the 

circumstances. In addition, in numerous instances, EMC has made collection calls using cell 

phones that display only the borrower's local area code on the borrower's caller identification 

display ("caller ID"), and without identifying its name on the caller ID. EMC has used cell 

phones and caller ID in this fashion notwithstanding that EMC was not calling from the 

borrower's local area code. 

20. As a mortgage servicer, EMC "advances" money to a borrower to pay for items, 

such as property inspections, that it deems necessary to protect the note holder's rights in the 

property. Pursuant to the mortgage contract, EMC adds these "corporate advances" to the 

consumer's loan balance. In many instances, however, EMC has charged borrowers for property 

inspections that were not authorized by the mortgage contract. For example, EMC has charged 

borrowers for alleged property inspection fees, where the purpose of the inspector's visit to the 

consumer's home was to attempt to collect on the loan. In addition, EMC has charged borrowers 

for property inspections on newly acquired loans notwithstanding that EMC lacked a reasonable 

basis for the need for a property inspection. 

21. As a mortgage servicer, EMC also charges borrowers other fees, such as late fees 

in connection with alleged defaults and prepayment penalties in connection with loan payoffs. 

In numerous instances, defendants have charged borrowers for fees, including late fees and 

prepayment penalties, in violation of state law. 

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22. In addition, in numerous instances, EMC has charged borrowers a loan 

modification fee - typically, $500 - and automatically included this fee in the principal balance 

ofthe modified loan on which interest accrued. In doing so, EMC has caused the borrower's 

loan balance to increase and created a new transaction, but has failed to provide the borrower 

with new loan disclosures as required by the TILA's Regulation Z. In addition, EMC has 

misrepresented that its modification fee is a corporate advance authorized by the mortgage 

contract, and has charged borrowers for the fee without authorization. 

23. When borrowers request the amount ofmoney necessary to reinstate or payoff 

their loan, and in other instances where EMC seeks payment, EMC's demands often contain fees 

that have been assessed by EMC, including fees for property inspections, late fees, prepayment 

penalties, and loan modifications. In many instances, these demands include unauthorized fees. 

FEDERAL TRADE COMMISSION ACT VIOLATIONS
 

Count I: Misrepresentation of Amounts Owed
 

24. Plaintiff incorporates by reference all the foregoing paragraphs. 

25. In the course and conduct of their loan servicing and collection, defendants in 

numerous instances have represented, expressly or by implication, that consumers owe the 

amounts specified in defendants' communications. 

26. In truth and in fact, in numerous instances, consumers do not owe the amounts 

that have been specified in defendants' communications. Consumers do not owe the amounts 

specified because, for example, (a) fees included in the amounts specified are not allowed under 

the mortgage contract or permitted by law; and/or (b) the amounts specified have been assessed 

or calculated incorrectly. 

27. Therefore, defendants' representations as set forth in paragraph 25 are false or 

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misleading and constitute deceptive acts or practices in violation of Section 5(a) ofthe FTC Act, 

15 U.S.C. § 45(a). 

Count II: Unfair and Deceptive Assessment and Collection of Fees 

28. Plaintiff incorporates by reference all the foregoing paragraphs. 

29. In the course and conduct oftheir loan servicing and collection, defendants in 

numerous instances have represented, expressly or by implication, that fees assessed and 

collected by EMC were (a) allowed under the mortgage contract and (b) permitted by law. 

30. On numerous occasions, the fees assessed and collected by EMC were (a) not 

allowed under the mortgage contract or (b) not permitted by law. Nonetheless, EMC improperly 

assessed and collected these fees. 

31. Defendants' actions have caused and are likely to cause substantial injury to 

consumers. This injury is not reasonably avoidable by consumers and not outweighed by 

countervailing benefits to consumers or competition. 

32. Defendants' acts or practices constitute unfair and deceptive acts or practices in 

or affecting commerce in violation of Section 5(a) ofthe Federal Trade Commission Act, 15 

U.S.C. § 45(a). 

Count III: Deceptive Reasonable Basis Claims 

33. Plaintiffincorporates by reference all the foregoing paragraphs. 

34. In the course and conduct oftheir loan servicing and collection, defendants in 

numerous instances have represented, expressly or by implication, that they possessed and relied 

on a reasonable basis substantiating their representations about consumers' loans. 

35. In truth and in fact, in numerous instances, defendants have not possessed and 

relied on a reasonable basis substantiating their representations about consumers' loans. 

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36. Therefore, defendants' representations as set forth in paragraph 34 are false or 

misleading and constitute deceptive acts or practices in violation of Section 5(a) ofthe FTC Act, 

15 U.S.C. § 45(a). 

VIOLATIONS OF THE FAIR DEBT COLLECTION PRACTICES ACT 

37. In 1977, Congress passed the FDCPA, 15 U.S.C. § 1692 et seq., which became 

effective in 1978, and has been in force since that date. Section 814 ofthe FDCPA, 15 U.S.C. 

§ 1692/, specifically empowers the Commission to enforce the FDCPA. Under its provisions, 

for purposes ofthe exercise by the Commission ofits functions and powers under the FTC Act, a 

violation ofthe FDCPA is deemed an unfair or deceptive practice in violation ofthe FTC Act. 

Further, the Commission is authorized to use all ofits functions and powers under the FTC Act 

to enforce compliance with the FDCPA by any person, irrespective of whether that person is 

engaged in commerce or meets any other jurisdictional tests set by the FTC Act. The authority 

of the Commission in this regard includes the power to enforce the provisions of the FDCPA in 

the same manner as ifthe violations of the FDCPA were violations ofa Federal Trade 

Commission trade regulation rule. 

Count IV: Harassment or Abuse 

38.	 Plaintiff incorporates by reference all the foregoing paragraphs. 

39. On numerous occasions, in connection with the collection of debts that were in 

default when obtained by defendants, defendants have used conduct the natural consequence of 

which is to harass, oppress, or abuse any person, in violation of Section 806 ofthe FDCPA, 15 

U.S.C. § 1692d, including but not limited to: 

(a)	 causing a telephone to ring or engaging any person in telephone 

conversation repeatedly or continuously with intent to annoy, abuse, or 

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harass any person at the called number, in violation of Section 806(5) of 

the FDCPA, 15 U.S.C. § 1692d(5); and 

(b)	 the placement oftelephone calls without meaningful disclosure ofthe 

caller's identity, in violation of Section 806(6) ofthe FDCPA, 15 U.S.C. 

§ 1692d(6). 

40. Pursuant to Section 814 ofthe FDCPA, 15 U.S.C. § 1692/, the acts and practices 

alleged in paragraph 39 also constitute unfair or deceptive acts or practices in violation ofthe 

FTC Act. 

Count V: False or Misleadine Representations 

41.	 Plaintiff incorporates by reference all the foregoing paragraphs. 

42. On numerous occasions, in connection with the collection of debts that were in 

default when obtained by defendants, defendants have used false, deceptive, or misleading 

representations or means, in violation of Section 807 of the FDCPA, 15 U.S.C. § 1692e, 

including but not limited to: 

(a)	 Falsely representing the character, amount, or legal status ofa debt, or any 

services rendered or compensation which may be lawfully received by a 

debt collector for collection of a debt, in violation of Sections 807(2)(A) 

and (B) ofthe FDCPA, 15 U.S.C. §§ 1692e(2)(A) and (B); 

(b)	 Communicating or threatening to communicate to any person credit 

information which is known or which should be known to be false, 

including the failure to communicate that a disputed debt is disputed, in 

violation of Section 807(8) ofthe FDCPA, 15 U.S.C. § 1692e(8); 

(c)	 Using false representations or deceptive means to collect or attempt to 

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collect a debt or to obtain information concerning a consumer, in violation 

of Section 807(10) ofthe FDCPA, 15 U.S.C. § 1692e(10); and 

(d)	 Failing to disclose in the initial written communication with the consumer 

and, in addition, if the initial communication with the consumer is oral, in 

that initial oral communication, that the debt collector is attempting to 

collect a debt and that any information obtained will be used for that 

purpose, in violation of Section 807(11) ofthe FDCPA, 15 U.S.C. 

§ 1692e(11). 

43. Pursuant to Section 814 ofthe FDCPA, 15U.S.C. § 1692/, the acts and practices 

alleged in paragraph 42 also constitute unfair or deceptive acts or practices in violation ofthe 

FTC Act. 

Count VI: Unfair Practices 

44.	 Plaintiffincorporates by reference all the foregoing paragraphs. 

45. On numerous occasions, in connection with the collection of debts that were in 

default when obtained by defendants, defendants have used unfair or unconscionable means to 

collect or attempt to collect a debt, including but not limited to collecting amounts (including 

any interest, fee, charge, or expense incidental to the principal obligation) not authorized by the 

agreement creating the debt or permitted by law, in violation of Section 808(1) ofthe FDCPA, 

15 U.S.C. § 1692f(1). 

46. Pursuant to Section 814 ofthe FDCPA, 15 U.S.c. § 1692/, the acts and practices 

alleged in paragraph 45 also constitute unfair or deceptive acts or practices in violation ofthe 

FTC Act. 

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Count VII: Validation of Debts 

47. Plaintiff incorporates by reference all the foregoing paragraphs. 

48. On numerous occasions, in connection with the collection of debts that were in 

default when obtained by defendants, defendants have failed to notify consumers oftheir right to 

dispute and obtain verification oftheir debts and to obtain the name ofthe original creditor, 

either in the initial communication with consumers by defendants, or within five days thereafter, 

in violation of Section 809(a) ofthe FDCPA, 15 U.S.C. § 1692g(a). 

49. Pursuant to Section 814 ofthe FDCPA, 15 U.S.c. § 1692/, the acts and practices 

alleged in paragraph 48 also constitute unfair or deceptive acts or practices in violation ofthe 

FTC Act. 

VIOLATIONS OF THE FAIR CREDIT REPORTING ACT 

50. In 1970, Congress passed the FCRA, 15 U.S.C. § 1681 et seq., which became 

effective in 1971, and has been in force since that date. Section 621(a) of the FCRA, 15 U.S.C. 

§ 1681s(a), specifically empowers the Commission to enforce the FCRA. Under its provisions, 

for purposes of the exercise by the Commission of its functions and powers under the FTC Act, a 

violation of the FCRA is deemed an unfair or deceptive practice in violation ofthe FTC Act. 

Further, the Commission is authorized to use all of its functions and powers under the FTC Act 

to enforce compliance with the FCRA by any person, irrespective of whether that person is 

engaged in commerce or meets any other jurisdictional tests set by the FTC Act. 

Count VIII: Failure to Report Disputes 

51. Plaintiff incorporates by reference all the foregoing paragraphs. 

52. In numerous instances in which consumers have informed defendants that they 

dispute the completeness or accuracy of information furnished by defendants to a consumer 

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reporting agency, defendants have not reported the disputes to any or all of the consumer 

reporting agencies to which they furnish or have furnished the information. 

53. The acts and practices alleged in paragraph 52 constitute violations of Section 

623(a)(3) of the FCRA, 15 U.S.c. § 1681s-2(a)(3). 

54. Pursuant to Section 621(a) of the FCRA, 15 U.S.C. § 1681s(a)(I), the acts and 

practices alleged in paragraph 52 also constitute unfair or deceptive acts or practices in violation 

of Section 5(a) of the FTC Act, 15 U.S.c. § 45(a). 

VIOLATIONS OF THE TILA'S REGULATION Z 

55. In 1968, Congress passed the TILA, 15 U.S.C. § 1601 et seq., which became 

effective in 1969, and has been in force since that date. Section 108(c) ofthe TILA, 15 U.S.C. 

§ 1607(c), specifically empowers the Commission to enforce the TILA. Under its provisions, for 

purposes of the exercise by the Commission of its functions and powers under the FTC Act, a 

violation of any requirement imposed under the TILA shall be deemed a violation of a 

requirement imposed under the FTC Act. Further, the Commission is authorized to use all of its 

functions and powers under the FTC Act to enforce compliance with the TILA by any person, 

irrespective of whether that person is engaged in commerce or meets any other jurisdictional 

tests set by the FTC Act. 

Count IX: Failure to Provide Required Disclosures 

56. Plaintiff incorporates by reference all the foregoing paragraphs. 

57. On numerous occasions, in the course and conduct ofloan servicing and 

collection, defendants have included the cost of a modification fee (typically, $500) in the 

unpaid principal balance ofmodified loans, without providing required disclosures, in violation 

of Sections 226.18 and 226.20 of Regulation Z, 12 C.F.R. §§ 226.18 and 226.20. Regulation Z, 

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12 C.F.R. § 226, is issued by the Board of Govemors ofthe Federal Reserve System and is the 

implementing regulation for the TILA. 

58. Pursuant to Section !08(c) ofthe TILA, 15 U.S.C. § 1607(c), every violation of 

the TILA and Regulation Z constitutes a violation of the FTC Act. 

CONSUMER INJURY 

59. Consumers have suffered, and will continue to suffer, substantial injury as a result 

ofdefendants' violations ofthe FTC Act, FDCPA, FCRA, and the TILA's Regulation Z. Absent 

injunctive relief by this Court, the defendants are likely to continue to injure consumers and 

harm the public interest. 

THIS COURT'S POWER TO GRANT RELIEF 

60. Section 13(b) ofthe FTC Act, 15 U.S.C. § 53(b), empowers this Court to grant 

injunctive and other ancillary relief, including consumer redress, disgorgement and restitution, to 

prevent and remedy any violations of any provision oflaw enforced by the Commission. 

61. This Court, in the exercise of its equitable jurisdiction, may award other ancillary 

relief to remedy injury caused by defendants' law violations. 

PRAYER FOR RELIEF 

WHEREFORE, plaintiffrequests that this Court, pursuant to section 13(b) ofthe FTC 

Act, 15 U.S.C. § 53(b), section 814(a) ofthe FDCPA, 15 U.S.C. § 1692/(a), section 621(a) ofthe 

FCRA, 15 U.S.C. § 1681s(a), section !08(c) ofthe TILA, 15 U.S.C. § 1607(c), and pursuant to 

its own equitable powers: 

1. Enter a permanent injunction to prevent future violations ofthe FTC Act, the 

FDCPA, the FCRA, and the TILA's Regulation Z; 

2. Award such relief as the Court finds necessary to redress injury to consumers 

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resulting from defendants' violations ofthe FTC Act, FDCPA, FCRA, and the 

TILA's Regulation Z, including but not limited to, rescission or reformation of 

contracts, restitution, the refund ofmonies paid, and disgorgement of ill-gotten 

gains; and 

3. Award plaintiffthe costs ofbringing this action, as well as such other and 

additional relief as the Court may determine to be just and proper. 

Dated: 

Respectfully submitted, 

FEDERAL TRADE COMMISSION: 

WILLIAM BLUMENTHAL 

General Counsel 

LUC)TMOis, ~-Attorney 

Washington State Bar #16510 

Stephen Shin, Attorney 

New York State Bar 

Kristin Williams, Attorney 

Virginia State Bar # 71561 

Attorneys for Plaintiff 

Federal Trade Commission 

600 Pennsylvania Avenue, N.W. 

Mail Drop NJ-3158 

Washington, D.C. 20580 

(202) 326-3224 (phone) 

(202) 326-3768 (facsimile) 

lmorris@ftc.gov (Ms. Morris' email) 

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