Chicago. In a landmark settlement that will set new standards for the lending industry, mortgage lender Household Finance Corp. has agreed with state regulators to change its lending practices - and to pay up to $484 million in consumer restitution nationwide for alleged unfair and deceptive lending practices in the "subprime" market. "This is the largest direct restitution amount ever in a state or federal consumer case," said Iowa Attorney General Tom Miller.
State attorneys general and financial regulators cooperated in the multi-state investigation. They alleged that Household violated state laws by misrepresenting loan terms and failing to disclose material information to borrowers. Consumers complained that Household charged far higher interest rates than promised, charged costly prepayment penalties, or deceived consumers about insurance policies. Some consumers were trapped in costly loans by some of the practices, the states alleged.
State officials said Household cooperated in the case when the states presented their concerns. The company worked quickly with the multi-state group, over a period of about four months, to develop and negotiate solutions to the practices identified by the states. Household heard the message of the states and moved to a settlement that will provide a model for the industry, state officials said.
The settlement includes Household International, Inc. (the parent company), Household Finance Corp., Beneficial Finance Corp., and Household Realty Corp. Household is based in Prospect Heights, Illinois.
State officials said the settlement provides nationwide relief to consumers and addresses practices in the lending industry that have been and will continue to be a priority effort for state consumer protection and financial regulators.
Under the settlement, consumers could receive up to $484 million in total restitution, depending on how many states participate.Thousands of consumers took out real estate loans with Household since 1999, the year the states allege the problem practices began.The agreement will take effect when states representing 80 percent of Household real estate business agree to it. Officials from at least 34 states already have indicated they support the framework of the settlement spelled out in the Agreement in Principle announced today.
Iowa Attorney General Tom Miller, New York State Superintendent of Banks Elizabeth McCaul, Washington State Attorney General Christine O. Gregoire, and North Carolina Attorney General Roy Cooper led the final negotiations resulting in the settlement.
Miller is the lead attorney general in the Household case and is chair of the Subprime Lending Committee of the National Association of Attorneys General (NAAG). Cooper is chair of the Consumer Protection Committee of NAAG. McCaul is the immediate past chairman of the conference of state bank supervisors and is the lead financial regulator for the case.
The working group of assistant attorneys general and financial regulators was coordinated by Assistant Attorney General Sandra Kane of Arizona.Primary investigative work upon which the case was based was done by the financial regulatory departments and attorney general offices of the states of Washington, New York, Minnesota, and Idaho.
Chicago News Conference:
Illinois Attorney General Jim Ryan hosted a news conference in Chicago Friday announcing the landmark agreement, along with Miller, Cooper, McCaul, Georgia Banking Commissioner David Sorrell, and Gregoire, who spoke by telephone from Washington.
"Owning a home to raise your family in is at the core of the American Dream," said Illinois Attorney General Ryan. "But because of the alleged deceptive practices in this case, many consumers found that dream turning into a financial nightmare. The states involved are working together to protect our nation's families."
McCaul, the New York Superintendent of Banks, said: "A major blow to predatory lending practices nationwide has been struck by this settlement. No longer will consumers be deceived and ill-informed when mortgaging their homes. Household's actions will not be tolerated. This unprecedented settlement of up to $484 million clearly sends a message to all who would take advantage of consumers. I am proud that all restitution will be returned directly to consumers. It is also gratifying that state banking regulators and state attorneys general have worked together to achieve this historic result."
Miller said the landmark settlement resulted from a crucial and unique partnership between state financial regulators and state attorney generals. "Someday, I hope we will look back on this as a turning point in lending to low and moderate income Americans when there is a home at stake," he said. "The settlement is unprecedented both in its amount and in the reform contained in the restrictions it places on questionable lending practices in the future. It is our intention that other lenders will have to live with the same reforms that are spelled out in this settlement."
The States' Investigation and Allegations:
Officials from 19 states and the District of Columbia began coordinating their efforts early this year after identifying a pattern of complaints from borrowers who said they had been misled into agreeing to home loans with far different and much more expensive terms than had been promised. Other states have joined the effort.
The multi-state investigation alleged that Household violated numerous provisions of state consumer fraud acts and financial regulations by misrepresenting loan terms and failing to disclose material information to borrowers.
In many of the cases, borrowers' monthly payments jumped dramatically, and some consumers were put at risk of losing or did lose their homes.
Many consumers said Household charged interest rates far higher than promised, and charged costly points and prepayment penalties, which were misrepresented. They also complained of deception about insurance policies.The amount of loan fees were often misrepresented or not explained at all. In many cases, borrowers were unaware they were charged the high fees.
Investigators contend that, when Household marketed its "E-Z pay" plan, consumers made loan payments every two weeks instead of once a month. Such payment schedules reduce the total amount of interest paid over the life of a loan, because consumers make the equivalent of 13 monthly payments each year, but investigators allege Household misrepresented those savings as lower interest rates.
In many cases, regulators claim, Household failed to properly inform consumers of loan costs and insurance premiums that were included in their loans. In other instances, borrowers who were led to believe they were receiving interest rates of about seven or eight percent were actually charged nearly twice that much. Borrowers also complained that they were charged costly prepayment penalties that were not clearly disclosed to them.
Under the settlement, Household agreed to:
- Pay up to $484 million in restitution to consumers nationwide, depending on how many states participate.
- Limit prepayment penalties on current and future home loans to only the first two years of a loan.
- Ensure that new home loans actually provide a benefit to consumers prior to making the loans.
- Limit up-front points and origination fees to 5%.
- Reform and improve disclosures to consumers.
- Reimburse states to cover the costs of the investigations into Household's practices.
- Eliminate "piggyback" second mortgages.
The written Agreement in Principle announced today between Household and the States will be contained in consent decrees to be presented to state courts throughout the country before the end of the year.
Each state will design its own restitution plan, since some of the lending practices varied significantly from state to state.The details of the settlement and the process by which consumers can apply for restitution are being finalized and will be announced at a later date.
Consumers do NOT need to contact state attorney general or financial regulator offices at this time. Restitution plans for each state will be formulated, and then states and a settlement administrator will inform consumers about restitution terms and procedures under the settlement.
State officials said the settlement specifies that the restitution fund could range from $387.5 million up to $484 million, depending on how many states participate. All states are eligible to take part. State officials expect almost all states to participate and that the restitution total will be at or close to the $484 million level. Each state's share of the restitution fund will be proportional to the state's percentage share of Household's total real estate loan secured dollar volume.
Attorney General and/or financial regulator officials from nineteen states plus DC began coordinating their work several months ago: AZ, CA, CT, FL, ID, IL, IA, MA, MI, MN, NC, NJ, NM, NY, OH, TX, VT, WA, WI, and the District of Columbia.
State Attorney Generals or state financial regulators (or both) in at least 44 states plus DC already have indicated they support the framework of the Agreement in Principle: AK, AZ, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MT, NE, NV, NH, NJ, NM, NY, NC, ND, OH, OK, OR, PA, RI, SC, SD, UT, VT, VA, WA, WV, WI and DC. (State Attorney Generals from 42 states and the District of Columbia, and financial regulatory agencies from 37 states support the settlement.)
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