New York Reaches Unprecedented, $484 Million Agreement With Predatory Lender
State Attorney General Spitzer, Governor George E. Pataki and Superintendent of Banking Elizabeth McCaul today announced an historic agreement with Household International ("Household"), the parent company of Household Finance Corporation and Beneficial Finance Corporation - two of the country's largest sub-prime mortgage lenders. Household will pay $484 million dollars in restitution to consumers nationwide - the largest restitution fund in American history established for consumers who were victims of "predatory" lending.
The restitution fund will be divided among the participating states based on their proportionate loan volume. New York's portion is expected to exceed $37 million.
Spitzer was joined by attorneys general and banking regulators from 20 states to negotiate a settlement that fundamentally alters the way a major player in the sub-prime home loan industry conducts its business. Under the terms of the agreement, Household will be limited to charging 5% in fees for making a loan for home financing, lower than the average 7.25 % it has charged consumers.
"This landmark settlement will usher in a new era in sub-prime mortgage lending in which all consumers are treated with honesty and fairness. For far too long, the sub-prime market has been a feeding ground for unscrupulous lenders looking to gouge the most vulnerable consumers. This settlement should send a message to the rest of the industry that predatory practices will not be tolerated," Spitzer said.
"This historic settlement will send a clear message across the State and throughout the nation -- predatory lending is wrong, it's 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."
The Attorney General's office commenced an investigation into Household's practices in September 2001 after receiving numerous complaints by consumers who had been duped into
refinancing existing, often unsecured, debt with Household. Household failed to disclose material information to consumers or misrepresented the terms of loans. For example, Household gave consumers loan proposals that omitted taxes and closing costs that the consumers would be required to pay. Consumers did not realize until after the closing that these costs were not included in the monthly payment amounts presented to them in the loan proposals. In other instances, consumers who applied for a single loan received two loans, were charged closing costs and fees on both loans, and unknowingly faced interest rates on the second loan that exceeded 21%. Spitzer's investigation charged that these practices violated state and federal consumer protection laws and New York Banking Department regulations.
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. State banking regulators and state attorneys general worked together to fashion a nationwide agreement that will benefit consumers across the country."
Household is one of the largest sub-prime lenders in the country. While sub-prime lenders provide credit to borrowers with damaged credit, some of these lenders have engaged in predatory practices whereby consumers -- even those with good credit -- are targeted to borrow money on disadvantageous terms, including high interest rates, steep bank fees and payments for undisclosed insurance products. The high costs serve to increase the consumer's debt burden and reduce the equity in the consumer's home. Often, the consumer winds up with a loan that has a higher rate than was originally disclosed.
Under terms of the settlement, Household immediately will cease engaging in practices that the states alleged were unlawful. Household will also be required to improve its disclosures to ensure that consumers better understand the terms of their loans and the nature of their transactions.
The agreement requires Household to:
- Limit its fees for making a loan to 5% of the loan amount;
- Limit the extent to which it can charge points or fees for refinancing a Household loan made within the previous year (a form of loan flipping);
- Reform and improve disclosures to consumers, including providing accurate disclosure of discount fees on loans;
- Ensure that each loan provides a tangible benefit to the consumer;
- Stop making more than one mortgage loan to a consumer within a ninety day period of time;
- Stop selling or financing single premium credit insurance on real estate loans;
- Provide an independent loan closer, with no financial interest in the loan, to ensure that consumers understand the terms of the loan; and
- Appoint an independent monitor to oversee the implementation and enforcement of these and other provisions for a period of five years.
The settlement covers Household's residential lending practices from January 1, 1999 to the present. Household is one of the largest consumer lending companies in the country. During the three-and-a-half year period covered by the agreement, Household made more than $30 billion worth of home loans to consumers nationwide. Approximately 8% of those loans were made to New York consumers.
The Attorney General expressed gratitude for the leadership that ACORN has provided to bring attention to the effects of predatory lending on communities nationwide.
Bertha Lewis, Executive Director of the New York chapter of ACORN, said: "We applaud Attorney General Spitzer for working with ACORN and others to bring the issue of predatory lending to light and to stop the offending behavior. We think this is a great start. We look forward to working with the Attorney General to ensure that Household does not continue its predatory practices, and ACORN will continue to fight against these illegal practices on all fronts."
This case is being handled in Spitzer's office by Assistant Attorney General Benjamin Bruce of the Rochester Regional office, Assistant Attorney General Mark Fleischer of the Consumer Frauds and Protection Bureau, and Assistant Attorneys General Lisa Landau and Tynia Richard of the Civil Rights Bureau. Christopher Holland, Senior Investigator in the Rochester regional office, handled the investigation.