Governor Pataki, Attorney General Spitzer Announce
Historic $484 Million Agreement with Household International, Inc.
Largest Predatory Lending Settlement in History / Household's Practices Slammed
October 11, 2002
Governor George E. Pataki and Attorney General Eliot Spitzer today announced an unprecedented $484 million agreement in principle with Household International Inc.("Household") regarding Household's residential mortgage lending practices. The agreement, which will provide approximately $37 million in restitution to up to 25,000 New York borrowers, is by far the largest in the history of predatory lending settlements across the country.
The State Banking Department and the State Attorney Generals Office, as part of a multi-state group comprised of financial regulators and state attorneys general, reached the settlement following lengthy investigations that uncovered various predatory lending practices.
"This historic settlement will send a clear message across the State and throughout the nation -- predatory lending is wrong, its illegal and it will not be tolerated," Governor Pataki said. "This agreement will provide major benefits to thousands of New Yorkers, while also raising industry standards, enhancing consumer protections and changing the way mortgage lending is conducted. I am proud of the Banking Department's record of protecting New Yorkers and their families from lenders that violate our consumer laws and regulations."
Attorney General Spitzer said, "For too long, the subprime market has been a feeding ground for unscrupulous lenders looking to gouge the most vulnerable consumers. This landmark settlement will usher in a new era in subprime mortgage lending in which all consumers are treated with honesty and fairness."
Under the terms of the multi-state agreement, Household will pay $484 million into a restitution fund to be allocated to each of the participating states, provided that all states participate in the agreement. If 80 percent of the states participate based on dollar loan volume, then $387.5 million will be deposited. Each state will then determine which borrowers are entitled to restitution and the restitution amount to be received.
Since loans made to New York consumers constitute 7.7% of the total nationwide dollar loan value, the agreement will result in approximately $37 million in restitution being available for distribution to up to approximately 25,000 New York borrowers. The multi-state group currently includes approximately thirty six states and the District of Columbia. Depending on the number of states that ultimately participate, restitution will be made to up to approximately 310,000 borrowers nationwide.
In addition, the State Banking Department has entered into a separate $6 million agreement calling for an additional $3 million in consumer restitution, $2.6 million in a settlement amount payable to the State and $1 million in consumer education as a result of improper and illegal fees charged by Household in New York.
New York State Superintendent of Banks Elizabeth McCaul said, "In addition to the monetary portion of the settlement, the injunctive relief provisions will significantly change the manner in which Household conducts business in the future. This agreement demonstrates the democratic process and the cooperation across the states to significantly change Household's corporate conduct. Governor Pataki is a national leader in stamping out predatory lending practices and has ordered the State Banking Department to use all of its authority to prevent abusive loans from being made."
Superintendent McCaul added, "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. 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."
Iowa Attorney General Tom Miller, Washington State Attorney General Christine O. Gregoire, North Carolina Attorney General Roy Cooper, and New York State Superintendent of Banks Elizabeth McCaul 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). Superintendent McCaul is the Immediate Past Chairman of the Conference of State Bank Supervisors and is the lead financial regulator for the case. Cooper is chair of the Consumer Protection Committee of NAAG. The working group of assistant attorneys general in the case was coordinated by Sandra Kane of Arizona. Barbara Kent of New York coordinated for state banking and financial regulators.
The changes set forth in the agreement will address all aspects of the loan origination process including the disclosures that will be made by Household, the negotiation process and the loan closing. The company has agreed to limit the number of points charged on a loan to five, clearly disclose the rate and points options to borrowers, accurately disclose the comparable terms of the proposed loan to the customer's current loan, close loans using an employee other than the employee that negotiated the loan, utilize a tangible net benefit test with regard to borrowers before making a loan and institute a compliance program that will be administered by an independent CPA firm to ensure that the Household branches are adhering to the changes implemented by the company.
Household has also agreed to limit (both retroactively and prospectively) the prepayment penalty for all of the loans it originated since 1999 to a two year period. Although this two year limitation will not affect New York borrowers since New York State law is more restrictive, it will have a major impact in other states where Household has included a five year prepayment penalty clause in its mortgage loans. Household has also agreed to reimburse the states to cover their administrative costs and fees and to retain an independent monitor for five years that will report to the multi-state group on Household's compliance with the agreement.
The problem practices that were the primary focus of the multi-state group revolve around Household's deceptive sales practices regarding the misrepresentation of interest rates, failure to disclose discount points, insurance packing, originating a second loan for the sole purpose to pay the points and fees charged on the first loan, failure to provide the required loan disclosures and misrepresentation of terms and conditions of various payment options.
In New York, the most prevalent deceptive practice was the failure to disclose the discount points being charged by Household and that these points were being added to the loan balance. Household's guidelines provide that 7.25 points are the maximum number of points that can be imposed on a loan. Household charged borrowers 4.25 origination points and up to 3 discount points. Approximately ninety three percent of the New York borrowers were charged the maximum 7.25 points on their loans even though the points were not properly disclosed by Household.
The State Banking Department investigation determined that customers applying for a loan were routinely quoted the interest rate without being informed that this rate corresponded to payment of the maximum number of points and that they could choose to pay fewer points but receive a higher interest rate. Charging the maximum amount of points provided the most financial benefit to Household.
The settlements cover Household's residential real estate lending activity from January 1,1999 through September 30, 2002. The two licensed mortgage banker Household subsidiaries that do business in New York that will be affected by the settlement are Household Finance Realty Corporation of New York and Beneficial Homeowners Service Corporation.
Household is a publicly traded company engaged primarily in subprime lending. It operates in 46 states, including New York, and the District of Columbia as well as internationally.
Last week, Governor Pataki signed into law legislation designed to combat predatory lending practices in New York State. The legislation provides for additional disclosures to consumers, encourages counseling when applying for a high-cost home loan, and assignee liability in the case of foreclosure.
Predatory lending refers to loans that are unaffordable, contain hidden fees, involve repetitive refinancings that do not benefit the borrower, and/or whose costs do not not reflect the risk taken by lenders in making them. Several years ago, Governor Pataki directed the Banking Department to undertake a comprehensive review of the issue in order to devise a comprehensive plan to end these unscrupulous lending practices. As a result of numerous public hearings throughout the State and after engaging in additional public outreach, the Department adopted its Part 41 High Cost Home Loan regulation. Part 41, which became effective in October 2000, establishes parameters for the making of high cost home loans that ensure customer affordability and other protections in the subprime residential mortgage market.