By the Division of Banks

Press Release

Contact: Sarah Nathan/AG

October 11, 2002

(617) 727-2543

David Cotney/DOB

(617) 956-1510

Landmark Settlement to Return $484 Million to U.S. Consumers

BOSTON - Household Finance Corporation (HFC) has agreed to pay an estimated $13 million to Massachusetts consumers and revamp its business practices to settle allegations of predatory lending, Attorney General Tom Reilly and Massachusetts Commissioner of Banks Thomas J. Curry announced today.

The settlement, reached between Attorneys General and banking and financial regulators from 44 states, the District of Columbia and Household Finance, will return approximately $484 million to consumers across the United States - including more than 7,000 consumers in Massachusetts. The landmark settlement is the largest in a consumer lending case in Massachusetts and believed to be the largest ever in a state or federal consumer case.

"This agreement addresses issues that have long plagued the lending industry," AG Reilly said. "I appreciate Household Finance's willingness to take responsibility for its past practices, reimburse those consumers who were harmed, and permanently change the way it does business."

Today's announcement follows a multi-state investigation, led by state Attorneys General and banking and financial regulators, alleging that Household violated state laws by misrepresenting loan terms and failing to disclose material information to borrowers. The states' allegations against HFC date back to 1999.

"The Division of Banks has had a long-standing policy of zero-tolerance for predatory and abusive lending practices through our strong consumer protection regulations and strict enforcement," Banks Commissioner Curry said. "This settlement is important for consumers and will serve as a model for the industry to prevent further predatory practices."

The investigation was prompted by complaints from consumers accusing Household of charging higher interest rates than promised, adding costly prepayment penalties, and providing deceitful information about insurance policies. Some consumers were trapped in costly loans that they could not pay-off or refinance without incurring significant penalties. The amount of loan fees were often misrepresented or not explained and borrowers were often unaware that they were being charged high fees.

The Association of Community Organizations for Reform Now (ACORN), a grassroots advocacy group with a focus on predatory lending, also brought examples of Household's alleged practices to state regulators' attention. ACORN has also sponsored separate lawsuits against Household in several states, including Massachusetts.

State officials allege that Household failed to properly inform consumers of loan costs and insurance premiums that were included in their loans. Borrowers were also led to believe they were receiving interest rates of about seven or eight percent when they were actually being charged nearly twice that much. Borrowers also complained that they were charged costly prepayment penalties that were not clearly disclosed to them.

In many of the cases, borrowers' monthly payments jumped dramatically, and some consumers were put at risk of losing or did lose their homes.

Under the settlement, Household agrees to:

  • Pay up to $484 million in restitution to consumers nationwide.
  • Limit prepayment penalties on current and future home loans to only the first two years of a loan.
  • Ensure that new home loans provide a benefit to consumers prior to making the loans.
  • Limit up-front points and origination fees to 5 percent.
  • Reform and improve disclosures to consumers.
  • Reimburse states to cover the costs of the investigations into Household's practices.
  • Eliminate "piggyback" second mortgages.

AG Reilly's Office, the Division of Banks, along with state Attorneys General and banking and financial regulators from 18 other states and the District of Columbia, began coordinating efforts early this year 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. This group was joined by 26 other states in making today's announcement.

The settlement provides between $387.5 million to $484 million in restitution for consumers, depending on how many states participate. Massachusetts' share of the restitution fund will be proportional to the state's percentage share of Household's total real estate loan secured dollar volume.

By misrepresenting loan terms and failing to disclose material information to borrowers, Household allegedly violated several provisions of the Massachusetts Consumer Protection Act. Household is also alleged to have designed loans to circumvent Division of Banks' tough high cost home loan regulations.

"I want to thank AG Reilly and the Division of Banks for their long-standing and cooperative relationship which has resulted in today's significant agreement," said Jennifer Davis Carey, director of the Massachusetts Office of Consumer Affairs and Business Regulations. "In addition to strong consumer protections and enforcement, consumer education is an important tool in the fight against predatory lending in the Commonwealth."

The details of the settlement and the process by which consumers can apply for restitution are being finalized and will be announced at a later date. Since lending practices vary significantly from state to state, each state will design its own restitution plan.

Massachusetts joined the initial multi-state investigation with state Attorneys General and banking and financial regulators from Arizona, California, Connecticut, Florida, Idaho, Illinois, Iowa, Michigan, Minnesota, North Carolina, New Jersey, New Mexico, New York, Ohio, Texas, Vermont, Washington, Wisconsin and the District of Columbia.

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.

This is the second predatory lending case handled by AG Reilly's Office this year. In March, AG Reilly signed on to a $60 million multi-state settlement with First Alliance Mortgage Company of Irvine, California. In that case, First Alliance was accused of using unfair and deceptive business practices to defraud consumers out of thousands of dollars.

For more information about how to avoid credit or mortgage scams and home buying, visit AG Reilly's Web site at and

Consumers seeking more information can contact the Attorney General's Consumer Hotline at (617) 727-8400.

Consent decrees with the written agreement in principle between Household and the states will be filed in Massachusetts as well as in state courts throughout the country before the end of the year. Assistant Attorney General Judith Whiting of AG Reilly's Consumer Protection and Antitrust Division is handling the case with David Cotney, Senior Deputy Commissioner for Administration & Policy with the Massachusetts Division of Banks.