Mortgage Daily

Published On: October 7, 2002
Household May Settle With States for Up to Half BillionSettlement could be biggest ever for a U.S. company

October 7, 2002

By SAM GARCIA

Another subprime company may enter into a predatory lending-related settlement that would be among the biggest in U.S. history.According to the Wall Street Journal, Household International Inc. may be near a settlement with state attorneys general that could total $350 million to $500 million — far bigger than the recent record $215 million settlement between Citigroup and the Federal Trade Commission.

Sanford Bernstein Research analyst Howard Mason raised the prospect of the settlement in a new research report, the Journal said, and reportedly said he believes Household has the cash to make a restitution payment of $350 million to $500 million. Mason arrived at his settlement estimate by calculating the fees, loan rates and credit insurance provided to Household clients.

The Journal went on to report that Mason also said it may prove difficult to convince the attorneys general to agree to a settlement and, if no deal materializes, there is a danger that credit-rating agencies, “unnerved by chronic regulatory problems,” could downgrade the company’s debt.

Last January, Household agreed to refund $3 million to California consumers, pay $8.9 million to California’s Department of Corporations and affect significant changes in their lending practices to settle a predatory practices lawsuit filed by the California in November of last year.

class action suit was filed in Cook County, Illinois on behalf borrowers against Household last May. In that lawsuit, Household is accused of deliberately misleading borrowers about the terms and conditions of their loans, including high rates and fees, principal amounts which exceed the actual value of their homes, and prepayment penalties that effectively trap borrowers in overpriced loans.

The Association of Community Organizations for Reform Now — or ACORN, a constant critic of Household’s lending practices, filed a class action against the company in February, accusing Household of deliberately misleading borrowers with claims that they will save money by refinancing while trapping borrowers in overpriced loans by means of high loan-to-value ratios, prepayment penalties, and other restrictions.

The Prospect Heights, Illinois company also faces class action lawsuits from shareholders claiming that the company issued false statements about its operations. Household restated its financials in August to account differently for losses on uncollected finance charges and other fees on private-label receivables.

In addition to the recent settlement between Citigroup and the Federal Trade Commission, First Alliance Mortgage Company and its chief executive officer, Brian Chisick, settled with the FTC last March for $60 million. Chisick and his wife personally agreed to make a $20 million payment. First Alliance was accused of misleading customers about increases in the interest rate and the amount of monthly payments on adjustable rate mortgage (ARM) loans, and failing to provide the ARM booklet required by the Truth-in-Lending Act.

Household, a subprime finance company, reported in July that its real estate secured portfolio increased $9.1 billion in the second quarter from the same period in 2001 to $48.3 billion. Shares of Household closed Friday at $24.66, down $1.94 from the prior close, according to the Journal. The company’s stock had traded as high as $63.25 during April.


Sam Garcia has been in mortgage lending since 1980, and is publisher of MortgageDaily.com. He also owns and operates CloseNow.com, a real estate portal site.

email: [email protected]

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