Mortgage company to pay millions

States accused Household International of abusing customers. Many were minorities or elderly.

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published October 12, 2002

Household International Inc. said Friday it will pay up to $484-million to end state investigations into complaints that it overcharged and abused its customers. The nationwide mortgage company also said it will change many of its business practices.

The landmark agreement is the largest consumer settlement ever negotiated by state attorneys general, who cooperated on the case.

Florida is expected to receive $22.7-million, to be shared by the 14,700 Floridians who have taken out home loans with Household's HFC and Beneficial units since 1999.

The money is likely to be particularly welcome because Household targets homeowners with bad credit. They often end up owing the company more than their houses are worth.

"Those impacted by these types of practices are often racial minorities and the elderly, whose entire wealth is often tied up in their homes," said Florida Attorney General Bob Butterworth. His office will decide how to divide the money.

"We want to do something that's as fair as possible," said Jack Norris, chief of multistate litigation. He said the distribution formula will take into account the damages a customer suffered. "We're going to be sending out letters once we get the master list of who's affected, then we'll do an analysis to decide who should get what back."

Norris said the state also plans to go after other lenders who specialize in the subprime market for people with poor credit. Citigroup Inc. agreed last month to a $215-million settlement with the Federal Trade Commission over similar issues.

Florida investigators subpoenaed a sampling of Household's customer records in November after getting customer complaints and began working with other states in the spring.

"Our early talks with Household were not fruitful, but as the group gained momentum, they began to realize we were serious," said Allison Bethel, director of the civil rights section of Butterworth's office. She said defending itself against each state separately would have been a costly disaster for Household.

The investigations have weighed on Household's stock price, which got a lift from news that a settlement had been reached. The stock, which traded for more than $60 a share as recently as May, closed Friday at $29.20, up $1.90. The company plans to take an after-tax charge of $330-million in the third quarter to pay settlement costs.

Household, which has its headquarters in Prospect Heights, Ill., admitted no wrongdoing, but issued an apology:

"For 125 years, we have set high standards for ourselves as a company and we apologize to our valued customers for not always living up to their expectations," said William F. Aldinger, chairman and chief executive.

Household agreed to numerous changes in the business practices at its 1,400 HFC and Beneficial branches across the country. Some were announced previously but will now be legally enforceable. Among the changes:

Reducing the duration of prepayment penalties to two years. Bethel said the files she reviewed showed people paying $3,200 to $4,600 if they paid off a loan in the first five years. The reduction will apply to existing loans as well as new ones.

Capping loan origination fees and points at 5 percent. The company had been charging 7.25 percent on average.

Eliminating the sale of single-premium credit life insurance, which repays a mortgage if a homeowner dies. Household formerly charged customers in advance for life insurance premiums for the full term of the loan. If they paid off the loan earlier, the money was wasted.

Giving borrowers the lowest rate for which they qualify on the products for which they apply. Household was accused of overcharging customers with good credit.

Providing better disclosure, including warnings on unsolicited checks distributed by mail that cashing them is a loan that has to be paid back.

Compliance monitoring, including "secret shoppers" and loan processors who are not paid by commission.

The longtime Household adversary praised the settlement.

"We spent a long time trying to focus attention on Household's practices and are very glad that there's some progress being made," said Lisa Donner, director of the financial justice center for ACORN, a consumer reform group. "Although $484-million is a big number, it's small compared to the number of borrowers and the damages they suffered."

The group has supported efforts to outlaw abusive lending practices and also has filed still-pending class-action lawsuits against Household. Last year, ACORN members picketed Household's annual meeting when it was held at a company facility in Brandon.

The Household settlement takes effect when states representing 80 percent of the company's real estate business have signed the agreement. Norris, in the Attorney General's Office, said enough states already are committed to signing and he expects the rest to follow.

-- Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.

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