Settlement Announced with Mortgage Lender
This news release was issued jointly by the Department of Banking and the Attorney General.
October 11, 2002 -
Attorney General Richard Blumenthal and Department of Banking Commissioner John P. Burke today announced a landmark multi-state settlement in principle with Chicago-based mortgage lender Household Finance regarding the company's mortgage-lending practices.
Under the settlement agreement, Household will pay up to $484 million for consumer restitution nationwide (the exact amount will depend on the number of states that sign on to the settlement). Each state will receive an allotted amount of money based on total volume of loans in that state – Connecticut will receive 1.28 percent of the settlement money. Restitution of up to $6.2 million will be paid to Connecticut's Household customers, a possible total of 3,500 consumers. Household also will be required to reform its business practices.
"These predatory loan practices turned the American dream of homeownership into a nightmare," Blumenthal said. "Household's pitch camouflaged unconscionably high interest rates, excessive fees, abusive prepayment penalties, and unnecessary insurance charges. This settlement stops lending practices that prey on vulnerable, unsuspecting consumers. Household exploited homebuyers by failing to properly inform them of loan costs and insurance charges included in loan payments. The company was forthright and forthcoming in reaching this settlement. It sends a solid message to the subprime industry."
"The banking department has continually tried to find ways to prevent abusive mortgage lending practices," explained Commissioner Burke. "The legislation we introduced and urged legislators to pass into law last year created ways to protect Connecticut consumers, especially low-income and elderly homeowners, from excessive fees, unsuitable lending and refinancing programs that are of little benefit to them."
"When we detect unreasonable lending practices being marketed to consumers we will rein in the unscrupulous lenders to put a stop to the practices and attempt to recover restitution when possible," Commissioner Burke said, indicating that he was pleased with Household Finance's willingness to accept liability for its past sins and for restoring confidence in the subprime industry by quickly acknowledging its responsibility to pay restitution and to make changes in the way it does business.
The settlement also states that Household's 'E-Z Pay' plan misrepresented lower interest rates to consumers. The plan called for consumers to make loan payments every two weeks rather than monthly. Such payment schedules reduce the total amount paid over the life of a loan, but it is believed that Household misrepresented the savings as lower interest rates. In some instances, Household promised consumers an interest rate of about 7 percent but then charged consumers an actual rate of between 12 percent and 24 percent.
Attorneys General and banking and financial regulators from 19 states and Washington, D.C. began a multistate investigation last spring 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. In many of the cases, borrowers' monthly payments rose dramatically, and some consumers were put at risk of losing, or did lose, their homes.
Approximately 3,500 Connecticut consumers have loans with Household and could be affected by this settlement. Details on how consumers can apply for restitution are being finalized and will be announced at a later date.
Blumenthal said that many consumers stated that Household charged interest rates far higher than promised, charged costly prepayment penalties, and forced them to buy expensive, and often unnecessary, insurance policies. The settlement agreement alleged that Household employees utilized a complex sales scheme to deceive borrowers about the terms of their loans.
Under the settlement, Household agreed to:
- Pay up to $484 million in restitution;
- Limit prepayment penalties on current and future loans only to the first two years of a loan;
- Ensure that loans actually provide a benefit to consumers prior to making the loan;
- Reform and improve disclosures to consumers; and
- Reimburse Connecticut $200,000 to cover the costs of the investigations into Household's practices.
Joining Connecticut in the initial investigation were: Arizona, California, Florida, Idaho, Illinois, Iowa, Massachusetts, Michigan, Minnesota, North Carolina, New Jersey, New Mexico, New York, Ohio, Texas, Washington, Wisconsin, Vermont, and Washington, D.C.