Released: October 11, 2002

Minnesota, 34 other states reach settlement with Household Finance
$484 million in restitution to consumers; predatory lending practices addressed

(St. Paul) – Commerce Commissioner Jim Bernstein and Attorney General Mike Hatch today announced a landmark multi-state settlement with Household Finance Corporation regarding the company’s predatory lending practices in Minnesota.

Household will pay up to $484 million in restitution nationally – approximately $ 5.5 million to Minnesota consumers – for alleged unfair and deceptive lending practices in the "subprime" market. The restitution amount is believed to be the largest ever in a state or federal consumer case.

Financial service regulators and attorneys general in Minnesota, Washington, Iowa, and Arizona initiated the multi-state investigation and were joined by 15 other states in a unique partnership. Allegations from the yearlong investigation include misrepresentation of loan terms and failure to disclose material information to borrowers.

The Minnesota Department of Commerce and Minnesota Attorney General’s Office received numerous complaints from consumers alleging that Household charged hidden fees of more than 7%, costly prepayment penalties that were not clearly disclosed, and included credit insurance policies in loans without the borrower’s knowledge. In some cases, borrowers also were led to believe they were receiving interest rates of 7% to 8%, but were actually charged much more.

"Household’s corporate culture encouraged rather than prohibited these deceptive and abusive lending practices," said Commerce Commissioner Jim Bernstein. "Household took advantage of Minnesota consumers who were facing difficult financial situations and, as a result, many were trapped in costly loans. When we talked with regulators in other states, the story was the same."

"Household targeted people with poor credit and often put them deeper in the hole. The company hid from homeowners the huge fees it charged and confused people about the real interest rate," said Attorney General Mike Hatch. " Perhaps worst of all, Household tricked homeowners into loans with extraordinarily burdensome prepayment penalties, so the homeowners were stuck with these unfair mortgages."

In addition to financial relief to its customers, the settlement also requires Household to address practices in the lending industry that are a priority for state consumer protection and banking regulators across the country. Under terms of the agreement, the company will:

• Limit prepayment penalties on current and future loans to the first two years of the loan.
• Put limits on the frequency of loan refinancings.
• Reform and improve disclosures to consumers.
• Eliminate "piggyback" second mortgages.
• Ensure that new loans actually provide a benefit to consumers prior to making the loans.

The details of the settlement and the process by which consumers will be contacted regarding restitution are being finalized by each state, since lending practices by Household varied from state to state. In Minnesota, approximately 3,000 consumers obtained real estate loans from Household since 1999, the year the states allege the problem practices began. Each affected Household customer in Minnesota will likely receive approximately $2,000.

The settlement specifies that the restitution fund could range from $387.5 million up to $484 million, depending on participation by states. 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. Minnesota share of Household’s real estate loans is just over 1%. California ranks first with 18.4% of Household’s loan volume.

Household will also reimburse all the states who participate in the settlement up to a total of $10 million for all states to cover investigative costs and expenses related to administering the restitution program.

State Attorney Generals or state financial regulators (or both) in 34 states plus DC already have indicated they support the framework of the Agreement in Principle: AK, AZ, CA, CO, CT, FL, GA, HA, ID, IL, IN, IA, KS, LA, MD, MA, MI, MN, MS, MT, NE, NV, NJ, NY, NC, OH, OR, PA, RI, SD, UT, VT, WA, WV, DC.

The settlement includes Household International, Inc. (the parent company), Household Finance Corp., Household Realty Corp., and Beneficial Finance Corp. Household is based in Prospect Heights, Illinois.

Household’s real estate loan customers (between 1999 and present) may call the Minnesota Department of Commerce for more information. In the Twin Cities, dial 651-296-2488 or toll free in Greater Minnesota, 1-800-657-3602, and select the "real estate" option from the menu.

Predatory lending

• Most predatory lending occurs in the "subprime" market. Subprime loans are typically 1 to 10 percentage points higher than the best rate available. The loans are marketed to borrowers with poor credit or low income.
• Predatory practices include offering loans to people who do not have the ability to pay back the loan, switching – or "flipping" - borrowers from low interest loans to higher cost loans, encouraging repeated refinancing, misrepresenting terms of the loan, and "packing" single premium credit insurance or other fees into the loan.
• A recent law, introduced by the Department of Commerce and passed by the Minnesota legislature this year, addresses two predatory lending abuses. Effective January 1, 2003, residential mortgage lenders are prohibited from adding points and fees to the loan balance in excess of 5%. In addition, the law limits prepayment penalties and requires lenders to make striking written and oral disclosure.

Consumer tips

• Shop around for the best terms. Interest rates and fees vary widely. Don’t assume you will not qualify for a loan from a traditional lender.
• Ask for help from someone you trust - banker, financial advisor, tax expert, or non-profit organizations –such as the Home Ownership Center or Consumer Credit Counseling.
• Make sure you know the amount of, and reason for, all the loan charges. You have the right to get a Good Faith Estimate within three days of application. You also can request a "Settlement Statement" at least one day before closing. Go over all the numbers on the Settlement Statement-- ask for independent help if you don’t understand any item.
• Beware of lenders using telemarketing or door-to-door salespeople offering "bargain" loans, who pressure you to sign "immediately," or who call you offering next-day approval or guaranteed low-interest loans.
• Don’t focus only on monthly payment amount. A low monthly payment may not include escrow payments for taxes and insurance, or may hide high loan charges that increase the amount of your loan. Predatory lenders thrive on refinancing their loans for excessive fees and closing costs.
• Remember that a monthly payment amount for credit cards or other debt is very different that a monthly payment for a mortgage. Unlike credit card debt, if you can’t make your mortgage payment in the future, your home is at risk.
• Call the Minnesota Department of Commerce or the Attorney General’s Office if you have a complaint concerning the conduct of real estate or mortgage professionals or companies. In the Twin Cities, call the Department of Commerce at 651-296-2488 or toll free in Greater Minnesota, 1-800-657-3602. Consumers can reach the Attorney General’s Office at (651) 296-3353 or (800) 657-3787.