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(SACRAMENTO) – Attorney General Bill Lockyer today announced a landmark, $484 million settlement in a consumer protection investigation launched by the Attorneys General and banking regulators of 19 states and the District of Columbia against Household Finance Corp., one of the nation's largest mortgage lenders.
The multi-jurisdictional investigation alleged the company and its subsidiaries violated state laws by misrepresenting loan terms and failing to disclose important information to borrowers. Consumers complained that Household charged far higher interest rates than promised, charged exorbitant prepayment penalties and deceived consumers about insurance policies. Consumers often were trapped in costly loans by some of these practices, the states alleged.
This settlement provides nationwide relief to consumers struggling to scrape up enough money to fulfill one of our most cherished dreams: owning our own home," Lockyer said. "We will not tolerate predatory lenders who prey on hard-working families who only want to own a piece of the American Dream."
The investigation targeted Household Finance Corp., its Illinois-based parent company and its affiliates. In California, the two subsidiaries that make home loans are Household Finance Corp. of California and Beneficial California Inc. Under "the settlement, more than 45,000 California consumers who took out real estate loans with the Household companies since 1999 could receive up to $87 million in restitution.
The multi-state complaint alleged that Household engaged in a series of predatory lending practices, including failing to properly inform consumers of loan costs and insurance premiums that were included in their loans and making multiple loans to the same customer, which drained any remaining equity from the customer's home through repeat charges of loan origination and other fees.
Under the settlement, Household agreed to:
Pay up to $484 million in restitution to consumers nationwide;
Limit prepayment penalties on current and future loans only to the first two years of a loan;
Ensure that loans actually provide a benefit to consumers before making the loans;
Limit up-front points and origination fees to 5%;
Reform and improve disclosures to consumers;
Reimburse states for the costs of the investigation;
And eliminate "piggyback" second mortgages.
The states claimed Household routinely misled borrowers about the amount it charged for loan origination fees and interest rates on first mortgages. For example, Household promised interest rates of about 7 percent, but actually charged between 10 percent and 24 percent. While borrowers were told their loan origination fees would range between 0 percent and 10 percent, most were actually charged 7 percent.
The company also misled borrowers into believing they would receive lower interest rates if they made bi-weekly, rather than monthly, loan payments, according to the complaint. Borrowers also were forced to buy credit insurance, either without their consent or because Household said credit insurance was required. Although financed over the usual loan term of 30 years, the credit insurance policies sold by Household only covered the first five years of the loan.
The complaint also alleged Household routinely concealed from consumers the fact that they would be charged penalties for prepaying their loans. In some cases, borrowers who paid off a loan within the first five years were penalized a fee that equaled six months' worth of interest on the original amount financed, rather than the interest on the principal balance that was left when the loan was prepaid.
Under the agreement, Household will limit pre-payment penalties to the first two years of the loan. Lockyer said that provision will provide a significant benefit for California consumers, who make up more than half of the Household customers forced to pay the prepayment penalties.
The Attorneys General and banking and financial regulators began coordinating their efforts last spring after identifying a pattern of complaints from borrowers who said they had been misled into agreeing to home loans with far different and more expensive terms than had been promised. Household cooperated in the case, helping to develop and negotiate solutions to the problem practices identified by the states.
At least 36 states are involved in the settlement, and more may join. Final negotiations leading to the settlement were conducted by 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 McCall.
Each state's share of the restitution fund will be proportional to the state's share of Household real estate loans. More than 35 states have agreed to the settlement, and each state will design its own restitution plan. 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.